Tuesday, March 07, 2017

Three Dimensions of Focus That Power Trading Success

I recently offered a cognitive perspective on trading performance that emphasizes perception and skills in processing information as key determinants of success.  Many traders who struggle with their performance look to their emotions and personalities to improve their results, when in fact they are inputting and processing market-related information in inconsistent and ineffective ways.  Very often this is the result of a lack of solid mentoring.  It is through work with experienced mentors that we learn what to look for and what to do with that information.  That is how medical students learn at the bedside and how soldiers learn in the field.

For shorter-term traders--those for whom timing is an important component of performance--the quality of focus is crucial to successful pattern recognition.  Three focus elements are especially important:

1)  Intensity of Focus - The effective trader is immersed in market activity.  The less effective trader is distracted and hence not immersed.  The less effective trader may be distracted by looking at too many (random) things; they also may distracted by thinking about P/L while trying to read markets.  It is in the latter situation that personality and emotional issues interact with information processing to derail performance.  When traders become self-focused rather than market focused, perhaps out of a fear of losing or a concern over making money, they no longer remain receptive to market patterns.  This results in missed opportunities and the forcing of trades when opportunity is not present.

2)  Flexibility of Focus - The effective trader can shift focus quickly and often without losing intensity.  This is a very important skill.  Think of the painter who has to paint each brushstroke carefully to achieve the right effect, but then who must stand back from the composition to make sure that each element of the painting is in proper perspective and proportion.  Traders often have to focus on immediate price and volume behavior to see what is happening now, but it is in flexibly looking at larger time frames and how other stocks or assets are trading that a bigger picture appreciation of a trade's potential will emerge.  The less effective trader may focus intensely, but rigidly.  They see the trees, but miss the forest--or vice versa.

3)  Sustainability of Focus - We know from the research on willpower that our ability to sustain effortful processing is limited.  We become fatigued after a time and, with fatigue, we lose concentration.  Many trading problems with lack of discipline owe their genesis, not to underlying personality/emotional issues, but to weak concentration muscles.  The successful trader is able to sustain an intense, flexible focus for a considerable period and is good at quickly renewing willpower and concentration.  I worked with traders in Chicago who traded on a very short-term basis (several minute holding times) all day long, focusing on moment to moment shifts in order flow.  Their ability to stay absorbed for lengthy periods was a key ingredient in their success.  Those who lacked that ability moved to longer time frames and holding periods, where it was easier to trade intermittently, with breaks to renew concentration.

I've never met a successful short-term trader who did not accumulate significant screen time.  At one level the screen time was practice in identifying market patterns.  At another level, the screen time was exercise for focus muscles, helping build strength, flexibility, and endurance.  In Chicago, we played with a program that replayed market activity at half-speed and double-speed.  Half speed was great for learning patterns and seeing how they emerged.  Double speed was great for sustaining focus when things are coming at you quickly.  After practice sessions at double speed, normal market activity felt like half speed, enabling traders to pick up patterns readily.  We develop our cognitive performance by pushing our cognitive boundaries.

Further Reading:  The Importance of Trading With Focus