Monday, September 21, 2015

Stepping Back to Take a Step Forward in Trading

If appearances were accurate guides to reality, we all would make a ton of money in markets.  The challenging truth of the matter is that our cognitive biases ensure that what is apparent is not always what is real and true.  Often, we have to step back from our analyses, stop watching screens, and truly make an effort to see.  It is by stepping back that we can synthesize our observations and arrive at fresh conclusions.

This is a topic I took up in the recent podcast interview with Andrew Swanscott of Better System Trader.  He's assembled a great lineup of interviewees in his podcast series and did an excellent job of preparing for the session with his own questions and those from listeners.  We tackled the topic of creativity, among others, and the importance of opening the mind after focusing the mind.

Several traders I know engage in intensive chart reviews prior to the trading day and week.  They look at many charts at different time frames, often not spending a huge amount of time on each, but definitely watching in a highly focused state to observe detail.

Initially, I was skeptical of this practice, because I'm not convinced charts, in and of themselves, have a great deal of predictive value.  Because these were consistently successful traders, however, I knew that I should take their routines seriously.  The odds were good that something of value was derived from the exercise.

As Ayn Rand would have counseled, I should have checked my premises.  These traders weren't in the business of making predictions.  They were attempting to *understand* what was happening in markets.  So what did they gain from their chart review?

*  An idea of trending:  what was moving directionally and what wasn't; what was breaking out and what was in a quiet range;
*  An idea of context:  was the recent move part of a larger trend or range?
*  An idea of volatility:  were markets showing more or less movement over time?
*  An idea of correlation:  which markets or stocks were moving together?  Which correlations were breaking down?

All of these ideas were valuable, but what was most valuable was what came afterward.  The traders put aside their charts, stepped back, and simply pondered what they had observed.  Many times this occurred while taking a walk or relaxing in a chair.  What they were doing was looking across the charts and finding themes and patterns that made sense of their observations.  It was those themes and patterns that gave them their trade ideas.

Collecting and connecting puzzle pieces occurs in a different state of mind--a different workflow--from seeing the picture being assembled.  The deep look into things has to be followed by a broad look across things.  Stepping back allows us to see a larger picture, but if we don't precede the step back with intensive focus, we'll have no puzzle pieces to connect.  

Look into the charts.  Look across the charts.

Look into the data.  Look across the data.

Creativity lies at the intersection of microscope and telescope.

Thanks again to Swanny for the opportunity to share ideas with traders.

Further Reading:  The Role of Cognitive Style in Trading Success