Saturday, April 19, 2014

Trading, Creativity, and Becoming an Idea Factory

As I've mentioned in the past, discipline in trade execution and risk management is one part of the success equation in trading. Another part of that success equation is generating new ideas and fresh perspectives on markets.  Discipline and process orientation keeps us doing the right things.  Creativity enables us to discover those right things.

There are many ways of becoming an idea factory.  In a recent post, I described a method I use for establishing the price targets for trades.  Quantifying targets helps with the discipline and process orientation because it keeps me grounded in an updated appraisal of risk/reward.  But I find that quantification also helps with idea generation.

Here's an example:  A staple of my market analysis is to identify stable regimes in a market and a core group of drivers that account for a significant portion of variance in forward price movement during those regimes.  The models so derived did a nice job of anticipating the recent market strength, but did not do a great job of anticipating the prior market weakness.  This led me to investigate the current market and look for drivers of market action that I hadn't accounted for in the models.  Sure enough, it turns out that intermarket behavior was an important factor that I had neglected in the earlier modeling.  This led to new investigations and insights.  

One need not be quantitatively oriented to become an idea factory.  A hard-nosed review of losing trades will often identify where you have either misread markets or traded them suboptimally.  Either is fertile ground for learning and adaptation.

Henry Carstens is someone who I've cited as an example of an idea factory.  Take a look at the very creative idea he posted as a comment to the recent post.  This is a great example of the power of priming.  By posting to his computer screen the various elements of problems he wishes to solve, Henry stimulates the creation of new combinations and associations.  These are the foundation of fresh ideas.

Discipline and process orientation are necessary for success, but they are not sufficient.  As any business in a fast-changing market knows, it is not enough to execute stale ideas faithfully.  When you are an idea factory, you continuously renew your sources of edge in markets.

Further Reading:  Success and Failure Quotes