Wednesday, August 27, 2008

Implicit Learning and the Unattached Mind

In my books, I've described pattern recognition as fundamental to trading, with patterns learned through a process of implicit learning. Implicit learning occurs when we are exposed to multiple examples of patterns and thus become sensitive to the rules or regularities behind those patterns. This process is implicit in that it occurs without conscious calculation. For example, young children can speak in grammatical constructions--having heard so many sentence patterns over time--but they cannot verbalize the rules of proper grammar. Similarly, we know how to act and react in social situations, having experienced them so often, but could never formulate enough rules to capture our sensitivities to other people.

When traders see enough examples of supply and demand, they develop a "feel" for markets that is the result of implicit learning. Invariably, the very short-term traders (scalpers) I have worked with cannot verbalize their rules for entries and exits. They react to what they see, having seen those patterns play out thousands of times in the past.

This is why many experienced daytraders will encourage beginners to not think too much about markets. It's not just anti-intellectualism; they realize that explicit thought can interfere with access to implicitly encoded patterns.

When traders personalize their trading--when they attach their self-esteem to their results--they lose this access to implicit awareness. At those times, it's no longer about market patterns; it's about the trader. Bad trading is not necessarily emotional trading; after all, it's a kind of feeling that alerts traders to what they know. Rather, bad trading begins with attachments: to one's ideas, to trading results, to reputation, or to just being right. Once we are attached to what markets can bring us, we're no longer receptive to what we know implicitly. At that point, we are not mindful of patterns; we're mindlessly reacting to our own needs and desires.

This is where much self-help, coaching advice about trading has it all wrong. It's not about thinking more positively about yourself; it's about removing the self from pure performance skill. We cannot access what we know implicitly when we are locked into mindless patterns of explicit thought. To stay unattached to the outcomes of our actions when we are surrounded by vast risk and reward: this is why trading is such a vexing--and noble--challenge.