Sunday, February 16, 2014

Quality of Life and the Pursuit of Trading Excellence

Yes, I know, it's cruel to post a picture of a warm Mykonos beach when it seems that everyone is buried under polar vortex snow, but I promise there's a point to it!

Responding to the recent post on David Blaine and the development of expertise, reader David Ayer posed the following questions:

If trading as a mission is the only path to excellence, what about balance with the rest of things in life such as quality downtime or giving full attention to important others? Do these get sacrificed? If so are there mental health concerns?

I think these insightful questions reflect important concerns, but also misunderstandings.   

What we know about creativity is that it is at least a two-step process consisting of:  1) a period of immersion in a domain, where people absorb all they can about the world; and 2) a period of stepping back, where people can reflect upon what they've learned and put their observations together into new views of the world.  

It's a bit of a simplification, but I refer to the first process as analysis and the second as synthesis.  Creativity starts with a wealth of raw materials derived from intensive observation but doesn't blossom until there is an opportunity to synthesize what you've analyzed into a fresh perspective.

If you don't do the deep dives, analyze the charts, study the companies, put in the screen time, observe markets, research patterns, etc, you won't have the raw materials for synthesis.  There's nothing to synthesize if you haven't made the initial observations.  It's the immersion in observation that enables us to see what others don't--that gives us the rare and valuable raw materials.

But at some point people burn out if all they do is stare at a screen or conduct one deep dive after another.  It's the emergence from immersion that puts the mind in synthesis mode.  That's why so many of our choice insights come when we least expect them:  on walks, in the shower, or in dreams.

After a period of unusually intensive analysis, I took a vacation with Margie to Europe and we spent time in Mykonos.  It was a fresh setting, a beautiful locale, and a getting away from routine in every possible sense.  While photographing a picture-perfect sunset, a startling idea came to me based on everything I had been analyzing.  The essence of the idea was that all technical indicators boil down to a handful of variables, such as momentum and volatility.  The key is to distill all chart patterns and indicators into the smallest possible set of non-correlated variables, find optimal expressions for those variables, and then identify which of the variables are driving price action during particular market regimes.

It was a bit disorienting, as this undid much of my previous work, but it was also exhilarating.  The perspective seemed crystal clear--there was a "rightness" to it based on my recent observations.  I threw myself into pursuing the vision when I returned home and continue to refine the idea to this day.  The regression modeling that now is central to my daily market preparation leans heavily upon this structural, technical view.

So now let's revisit Mr. Ayer's challenging questions.  If you create a dichotomy between work and quality downtime, you'll always be a divided human being.  Creative productivity requires intensive work and quality downtime.  Indeed, from my perspective, one of the greatest performance problems traders face is both a lack of intensive, quality analysis time and a lack of quality downtime.  Traders stare at screens and flit from chat to chat without truly doing the deep analytic dives.  At the same time, they tell themselves that dedication to trading requires that they not take too much time away from markets.  As a result, their analyses and syntheses are lacking.

Analysis without synthesis is drudgery.  Synthesis without analysis is empty theorizing.  It is the combination of passionate immersion in markets and quality experiences away from markets that brings out our creative best.  What is the quality of your market time?  What is the quality of your time away from markets?  How efficient are you as a creativity machine?  As a generator of inspiration?  We can only find the right answers if we ask the right questions.

Greatness, Creativity, and Trading Success