Friday, June 05, 2015

Making Noise In Markets By Finding Silence Within

The quieter we become, the more we can hear.  It is difficult listening to markets when we are generating an internal racket.  A recent post from Bruce Bower discusses the topic of filtering out noise and making better trading decisions.  I'm not surprised that SMB readers selected it as one of the most important issues they face.  When traders manage risk and track markets on very short time frames, the internal dialogue easily goes into hyperdrive.  During active trading mode, there is relatively little time for reflecting and quieting the mind.  A deadly situation sets up when aggressive, competitive traders feel the need to trade more, thereby ramping up their internal noise.

We cannot master markets if we fail to master our minds.  The state of our trading relies on the state of our consciousness.  This is why work on my own trading increasingly focuses on brain training.  If markets can change their behavior faster than I can shift mindsets, I will be behind the curve.  We can train our minds not only to get into certain states--relaxed ones, focused ones, positive ones, quiet ones--but also to move flexibly among states.  None of that is possible if we're glued to screens, amped up on each market move, immersed in fight-or-flight mode rather than calm deliberation mode.

Here is one thing I've learned from my personal trading experiment:  If I do not spend five times as much time generating the trade idea as actually trading it, my results suffer.  The best trades come from situations in which multiple factors line up.  To detect that lining up, I need to update my factor measures (breadth, volatility, momentum, sentiment, and correlation), and I need to step back from these measures to see the larger picture in which they are lining up.  There is analysis, there is synthesis--and all of that is time away from actively trading and following what is happening on the screen.

If you want to get away from market noise, a great first step is to know what constitutes signal and spend quality, focused, relaxed time on that.

Further Reading:  Trading and Mindfulness