Saturday, May 19, 2018

Trading Without Expectations

There's a great post from Merritt Black in which a video plays an ambiguous sound.  If you think the sound is going to say "Brainstorm", that's what you hear.  If you think the sound is going to say "Green Needle", then you hear that!  It's the damndest thing..."brainstorm" sounds nothing like "green needle", and yet we can talk ourselves into hearing either one.

How like markets that is, however!  Two people look at the same chart and they come to radically different conclusions.  We come in to a trading day with a particular expectation and, with just a little confirmation bias, we can find the evidence we need to put on the corresponding trade.

It's yet another reason why trading with conviction is so dangerous.  The same conviction that leads us to get large in a trade is the set of entrenched assumptions that shape our perception.  We see what we believe.  We expect what we believe most strongly.  We act on what we expect.

Merritt's post got me thinking about my school days.  I took school seriously--my high school and college GPAs were between 3.8 and 3.9--but it was a certain kind of seriousness.  I would have a test coming up the next day (or a paper to write) and that afternoon I would play baseball or basketball.  I knew that I could pull a late nighter and get through the material, and that's exactly what I did.  When I got to the test (or when I wrote the paper) I honestly can't recall wondering if I would get a good grade or not.  I also can't recall thinking about what the teacher was looking for.  

When I got to a question I didn't know--or if I hit a block in writing the paper--I would put my pen down, relax my mind,  and go with the first thing that came to me.  I didn't think harder; in a sense, I stopped thinking and let the answer come to me.  I knew that I had encountered the information.  It was just a matter of letting it come to the surface.

What I see among many traders--and what I've noticed in my own worst trading--is starting out with a view and then looking for trades that fit that view.  More recently in my trading, I've begun the day with multiple hypotheses and then enter that open minded state to let the market tell me which hypothesis is playing out.  It's like listening to a person from another country:  you focus on picking up on their meaning, not imposing your own.

The last thing a student is supposed to do before a final exam is hit the intermural building and play hoops with the gym rats.  But that's what worked for me.  I had already taken my notes, gone to my classes, and read my book chapters.  By the time I was on the basketball court, all I needed was intensive review, not fresh learning.  When I got to the test, I knew I had done the most intensive review possible.  I didn't have to worry about what the instructor would ask, whether I would get a good grade, etc.

It's all very relevant to trading.  We do our preparation and our intensive review, but we don't let it become our lives.  When we're not sure, we relax the mind and let markets speak to us.  Eventually we'll make sense of it.  The idea is to understand, not to trade.  Perhaps this is why meditation is so helpful to many traders.  It's not only a way to relax and focus; it's also a way to cultivate an open mind.  We can see anything we're primed to see in markets.  The key is getting past that priming.  When we're actively prepared to see everything, we can quickly recognize when one scenario actually plays out.

It's amazing what we can see when we come to markets with acceptance, not expectation.

Further Reading: