Wednesday, November 26, 2014

Expanding Our Trading by Imposing Constraints

James Clear has an excellent blog post on the topic of how constraints can make us better.  His example is futsal, a soccer-like game played in a small indoor space with fewer players.  The combination of fewer players in a smaller space means that players touch the ball much more often than in traditional soccer and have to develop better ball-handling skills due to the lack of bounce of the futsal ball.  Because of the constraints of futsal, it is an idea training ground for soccer players.

When we create new constraints, we force ourselves to adapt.  This, in turn, exercises skills that otherwise might never be tapped.  When I supervised interns at a Chicago proprietary trading firm, I found software that replayed the day's market action at twice normal speed.  The faster price movement forced trainees to adapt and recognize market changes very quickly.  When they returned to live action, it seemed slow by comparison and they were able to recognize patterns occurring in an unhurried way.

Another constraint exercise for traders that I have found useful is to approach the market day by assuming that you can only place three trades all day long.  With only three bullets to fire, you have to adapt to the constraint by exercising unusual patience and selectivity, focusing on best setups at very good price levels.  This selectivity can be cultivated as a habit, as the constraints prevent traders from overtrading.

Clear's point is that constraints foster creativity.  We have to perform in new ways to adapt to challenging constraints.  If I only allow myself 30 minutes to read a book, I will cultivate the ability to skim chapters and glean main points.  If I'm only able to meet with someone for three counseling visits, I will plan exercises for those sessions that will make the greatest use of the limited time.  As Clear observes, limiting himself to 50 words enabled Dr. Seuss to write a best-selling book.

Constraints are a great example of how we grow by challenging ourselves.  Suppose you practice trading with a holding period one-tenth your norm...or ten times your norm.  How would you adapt and make money?  Suppose you could only watch one screen while trading...suppose you had to manage long and short positions that were entered for you randomly.  How would you make the most of the situation?  

By imposing limits, we expand our performance.

Further Reading:  Priming as Trading Preparation