Sunday, February 26, 2017

Perception and Trading Expertise

Jonathan Wai's excellent review of Fernand Gobet's summary of cross-disciplinary research on the development of expertise makes it clear that elite achievement in any field cannot be easily reduced to nature or nurture or any single factors.  Crucial to expertise is perception, because what we perceive dictates what we can process, store, and ultimately draw upon.  Something can be in our field of vision, but we may not see it.  Expert performers see more of their visual fields.  

When I trained as a therapist in graduate school, I was struck by differences in ability among the trainees.  I later noticed these differences even more glaringly when I began teaching brief therapy to interns and residents in psychology and psychiatry.  The less talented trainees simply did not perceive what was going on with the patient.  They were interpersonally insensitive.  For example, a client might begin talking about his or her childhood, start to show emotion, and then quickly change the topic.  The talented therapist would perceive this and either return the conversation to the avoided subject or bring the avoidance to the client's attention, as a way of exploring how feelings were being handled.  The less talented therapist would not notice the shift of topic and how/why it occurred.  They would simply allow the conversation to proceed without exploring the promising area.  As a result, their sessions were notably unproductive.

Detailed research of expert athletes by Helsen and Starkes found that top performers possess strong linkages between knowing and doing.  They not only understand what to do in various situations; they are able to efficiently act upon this information.  Helsen and Starkes explain that "Many athletes, coaches, researchers, as well as people in general, still misunderstand and underappreciate the importance of the cognitive demands in dynamic sport settings.  In team sports where the environment is constantly changing decisions and responses have to be made quickly and accurately" (p. 24).

Their conclusion could have been made for traders in financial markets, not just athletes.  As traders we indeed deal with constantly changing environments and need to make responses quickly and accurately.

A few years ago I directly observed a successful trader while he was trading.  I noticed that he had a highly organized manner of perceiving what was going on in the stock market.  He made reference to the broad market and what was happening in related macro markets, but quickly shifted attention to specific sectors within the market and individual stocks.  At one point he perceived opportunity trading the stock index futures.  A little while later, he placed trades in sector ETFs.  A less successful trader nearby had the same information on his screens but did not make note of the sector behavior.  He became narrowly focused on the general market and thus missed the opportunities in the sectors.

In football parlance, the talented trader was like a quarterback who could see the entire field.  A talented quarterback's perception takes in more, and that provides more options for successful action.  The quarterback who has narrower vision misses opportunities to make the big pass or the first down run.  Both quarterbacks can be knowledgeable about the game and both can have exemplary emotional awareness and control.  The difference is in perception.  We can only act upon what we see and process.

This helps to explain why so many young traders I've known who ultimately have developed into elite performers began their trading in intensive simulation mode.  They did not merely attend classrooms, and they did not simply read books on "setups" and begin trading.  Rather, they were like athletes watching game film, studying market behavior and reviewing their decisions at each juncture.  Developing chess players intensively study chess games--their own and those of masters--to see at each point in the game what the best options look like.  Their learning is all about practice and practice is all about training perception.  In Helsen and Starkes' terms, they are learning to coordinate their knowing and their doing.

The reason many traders fail is because markets change and they never truly return to the simulator.  They never retrain their perception.  This is a very important concept.

There is so much more to successful trading than learning good setups, following a discipline, and being aware of one's feelings.  Expert performance is a function of training:  training the eye and brain to truly see the entire playing field.

Further Reading:  Supercharging Your Learning as a Trader