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Trading Well: The MOST Important Thing
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Trading Well: The MOST Important Thing

  #31 (permalink)
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Research Paper: Sleight of Hand

I am working on a research paper about why MOST people end up losing money in the markets - this includes long term investors, position traders, swing traders, intraday swing traders and scalpers too.

This also includes professionals who keep minting money day in and day on 'normal' days out selling options and lose everything one dark murky day when the market makes an abnormally deep 'black swan' shock move.

The one observation is that time frames are not relevant in whether a trader net makes or loses money.

The second observation is that the winners take money from the losers 'right in front of their eyes' with their consensus and merely by being masters of exploiting human nature.

In the next few posts I want to present the premise of how great traders do not really trade the markets but simply 'trade other traders'.

In the next few posts we can clearly 'see' why the great traders are simply playing a game of subterfuge day after day after day.

It will also explain why patterns are exploited as edges rather than being edges themselves and why visual edges are incomplete information and why the critical missing piece of trading is the understanding of the human mind and cognition itself.

I will be omitting all the relevant data and simply make my point 'as is' without formal proof and mostly by empirical evidence.

Feedback and comments will be greatly appreciated!

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  #32 (permalink)
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The Role of Cognition

The human mind does not process everything it sees. We usually only process outliers and conflicting information.


Our visual senses which constitute 70% of all sensory information sent to the brain bombard the brain with overwhelming amounts of continuous data which would need an incredible amount of processing if processed in a linear method.

Thus, our information processing is a selective process based on choosing one part of information over the others.


Take a look at the picture that follows. Forget this discussion for a while and share what you FIRST saw distinctively
when you glanced at the picture:

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  #33 (permalink)
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The Role of Cognition: Contrasts


I am sure you have been through this process before, but just to reiterate, the two blobs of design that differ from the surroundings were distinctively highlighted by your brain.

Also, I saw the blob on the left side having thinner pattern lines while the blob on the right as having thicker lines.

However, and you may have already guessed where this is going, the two patterns have lines that are of the exact same thickness.

Thus the context in which the patterns appeared changed their interpretation completely.

This is how for a trader faced with uncertainty allows his selective cognitive processes to alter actions that otherwise would have resulted from his logical verbal reasoning.

An important point to be made is that visual and verbal information is stored in separate silos and are processed with the aid of 'memory'. (will be discussed in the next post).

The next post deals with how a experienced trader shields himself from the above bias and how his actions are carried out in complete awareness of the shortcomings of his own sensory apparatus.

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Humans: The Pattern Seekers

Here is where this gets interesting.

Even though our cognition does not cater to all bits of information we see, and though we process information selectively, the instinctual reaction is that we are drawn to familiar patterns i.e. we 'see' what we know and what we expect to see.

A master trader however has trained his eyes to look beyond the obvious, to process information apart from what our minds quickly categorize into a familiar pattern, to patiently wait for that critical 'hidden' information to seep into their consciousness before taking action.

Acting upon the obvious and most comfortable has been proven time and again to result in unexpected consequences for investors and traders, and the resulting spiral of inaction, shock, inaction, shock results in the premature and completely avoidable death march of a trading account.

However master traders are able to maintain their mindset because they have trained themselves to react deliberately and with a practiced deliberation, not instinctively. they realize that the visual cortex is a pattern seeker - and is subtle enough to overwhelm and overthrow their conscious decision making. They have firstly trained their cognition to 'look for' and actively seek out and react only when the hidden (to the masses) is easily visible to their trained eyes.

While this forms only a small part of a trading methodology, the other parts being managing risk by risking a small fraction of the bankroll without delusions of grandeur due to recent wins and executing the trained response action over and over without bias due to recent adversity.

However at all times the hidden and the obvious blend in front of a trader's eyes and the trader needs to focus on training the self to perceive the hidden parts which favor probability play.

For example in the following image of a rose another familiar but hidden shape has been cleverly concealed, yet it is obvious and visible only if you are looking for it:

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Do not read the next post until you have eyeballed the rose image for the hidden image!

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iqgod View Post
The human mind does not process everything it sees. We usually only process outliers and conflicting information.


Our visual senses which constitute 70% of all sensory information sent to the brain bombard the brain with overwhelming amounts of continuous data which would need an incredible amount of processing if processed in a linear method.

Thus, our information processing is a selective process based on choosing one part of information over the others.


Take a look at the picture that follows. Forget this discussion for a while and share what you FIRST saw distinctively
when you glanced at the picture:

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

For me it reminds me of the screen of a old black and white TV with no antenna plugged in. Regards Outlander

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  #36 (permalink)
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The Elusive Obvious: Hidden Dolphins in the Markets

If you haven't already, look at the picture below and now try to find it in the above image:

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Once we know what we are looking for the exercise becomes a mere formality.

An experienced trader has familiarized himself to the point of being an automaton as to what He/she has also practiced his correct response to the observed fact especially in time frames such as those found in scalping where the analysis-recognition-action response is to be acted out in extremely limited periods to optimally capitalize on an opportunity.

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iqgod View Post
If you haven't already, look at the picture below and now try to find it in the above image:

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Once we know what we are looking for the exercise becomes a mere formality.

An experienced trader has familiarized himself to the point of being an automaton as to what He/she has also practiced his correct response to the observed fact especially in time frames such as those found in scalping where the analysis-recognition-action response is to be acted out in extremely limited periods to optimally capitalize on an opportunity.

Well could not see the fish until you told me what to look for and even then I know what to look for it took some time to see it. Looking at you pictures is the same as looking at charts that I am not used to. Regards Outlander

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  #38 (permalink)
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Memory as the Foundation Stone of Cognition

The essence of the above two arguments thus leads to the logical premise that:

Memory is the most important foundation of the cognition process.

Though this is stating the plain obvious (what is there to recognize, unless already experienced? what can be retrieved if it is not stored?

This implies a memory stored that only needs to be retrieved that results in cognition.

But the way the human mind records a memory contributes to the third and final leg of the three-legged stool of self-deceit in the markets.

The minds only remembers the details that it attends to - only those parts of information enter the consciousness that the trader has focused on. This becomes a dangerous state to trade from - if a trader remembers the bullish implications to a pattern that he has successfully traded earlier then the bearish implications which are obvious to an otherwise neutral observer result in an extremely self-limited perception of risk that cause a trader to ignore those signs. Thus when the 'unexpected' happens the trader is susceptible to disbelief and unless he hs trained to adapt himself to the hew situation and move on, there may be uncomfortable periods where his instinctive reactions of self-preservation and survival may suddenly kick in causing unwanted behavioral traits to surface such as for e.g. moving his stop, freezing up and not managing the trade correctly, bailing out when in a small profit etc.

Here is another illustration where a trader 'needs to attend' his attention to specific areas to which he would otherwise be 'blind'.

For example 'Spot the difference' in these two photos:

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Photo source: Viewable/Downloadable Examples

In experiments conducted by Ronald Rensink when these two photos were flashed alternately to an audience with a blank screen in between for a fraction of a second, none of the audience would recognize any difference between the two unless they were focusing on an area that was actually different between the two while the change was being effect.

P.S.: The clump of trees to the left of the sphinx' head is missing in the right photo!

Thus now the astute trader needs not only to remember, he/she also needs to remember the right things and the fact that it may not have been a complete picture. Is it remarkable then, that finding and exploiting an edge in the market consistently is such a difficult task?

A trader truly is his/her own worst enemy till the above realizations are consciously and deliberately self-studied and then prevented from becoming subtle traps culminating into action / inaction.

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@iqgod

Very much enjoying your observations.

"the present changes the past" Alan Watts

Many thx
Kind regards

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Every moment I wake up I realize I know nothing, and then I smile...

Last edited by zt379; June 27th, 2013 at 08:04 AM.
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I love stuff like this. If you like this, you should not miss the show "Brain Games" on the Nat Geo channel. It's very similar to the kind of stuff you're doing and one of the most entertaining shows.

LIAR, LIAR | Brain Games | National Geographic Channel

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