Tuesday, December 23, 2014

Creativity is the New Discipline

One of the central themes of my new book is the importance of creativity in generating trading ideas with an edge.  What I call Trading Psychology 2.0 emphasizes flexible adaptation to changing markets, not rigid adherence to static trading methods.  From this perspective, creativity is the new discipline:  poor discipline shows up not only in emotional decision-making, but in consensus thinking.

You know that saying "Garbage In, Garbage Out"?  Poor quality inputs will lead to faulty outputs even if you employ the best of programming.  In trading we might say "Consensus In, Consensus Out".  If you look at the same things as everyone else, you'll pretty much wind up thinking--and trading--like everyone else.  That's not a good recipe for superior risk-adjusted returns.

To enhance our creativity, our discipline needs to be an improvement in our information diet.  We need to take in fresh information, better information, and information organized in new and useful ways.  I've long enjoyed the Finviz website as a source of novel perspective.  If you click on the heatmap above, you'll see major ETFs and the relative volume of their trading yesterday.  Light blue indicates much above average volume; dark indicates significantly below average volume.  At a single glance, we can see where money was flowing.  That's not a bad starting point for identifying rotational markets and sector/asset class based market themes.

How have the SPX stocks behaved on recent earnings days?  This heatmap gives a useful view, a quick visual take on whether the market is tending to be pleased or disappointed with company performance.  That's not a bad starting point for thinking about long/short themes.

Want a visual on the relative performance of various commodities?  Or how about a visual on the relative strength of various currencies?  Looking across asset classes, you can begin to detect emerging global themes.

But not all creativity comes from visualization.  Here is a well curated summary of breaking news and blog posts that can feed the head.

A great goal for 2015's trading is to enrich your capacity for market insight.  If you look at what others are not, you begin to ask questions they don't ask.  And that can lead to fresh answers.

Further Reading:  The Sobering Odds of Daytrading Success