Shut off the f*&king Podcast

This post will be a deviation from my series on Charlie Munger’s Cognitive Biases & Integral Theory in Finance.

As Americans we consume.  We consume as if our life depends on it.  When I say consume I’m sure you’re thinking, buying things on amazon.com or dining out.  This isn’t what I’m talking about.  I’m talking all consumption. Listening to music, podcasts, buy materials, education, learning, and anything where you are getting new input.

SHUT ALL THAT SHIT OFF and just sit in silence for 5 mins.  Watch how fast those thoughts speed through your mind.  See if you can shut it off. I doubt you can.  Why? Because you consume and you can’t stop.

The dialect of my generation is consumption with purpose.  “Spend money on experiences. Spend money on things that will save you time. Spend money on education & learning, or just download free podcasts.” CONSUME!

Stop consuming. Let the mind relax. Let your mind f&^king dream again. Explore your thoughts without hearing Entrepreneur on Fire in the background. Shut off the F&^king podcast.  Start Dreaming again.

 

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Charlie Munger – Cognitive Biases – Inconsistency-Avoidance Tendency

We tend not to behave in ways that are inconsistent with the beliefs we hold about ourselves.

Be careful about the beliefs you take on. We talked about this briefly in regards to integral theory with the post on Types.  Do you type yourself?  Do you read the attributes of the Cancer Astrology Symbol and take on those traits.  Do you read what successful traders do and label yourself as a successful trader?  According to a simplistic view of this bias, you would not behave in a way that would be inconsistent with a successful trader IF YOU TRULY believed you were. In my opinion, this is where it gets interesting.

We have the explicit and implicit selves and I believe we mainly have the tendency to avoid inconsistencies with the implicit self.  Let’s give an example. Ben tell everyone he wants to be a famous painter one day (explicit). However, even though he truly does want to be a famous painter his true belief is that he can’t.

When you talk to Ben he is vibrant, communicative and deeply passionate about painting.  He talks about all the things he could do and what he would do.  However, he goes home and watches T.V. Ben does not practice his craft of painting.  Why the discrepancy?  He truly does want to be a great painter at his core.  Here is where the bias comes in.

His core belief is that he can’t become a famous painter. So he acts according to that belief. He watches T.V. He hangs out with friends and avoids painting at home.  the implicit self, in my opinion, rules the day.

This bias also works on the positive side of things. If I believe myself to be a good person and I’m put in a position to question that moral, say by having to donate money to an animal charity. I am likely to donate. We all are.

In factor analysis, this is called the discrepancy function. It’s the difference between the original matrix and the reconstructed one.  I believe as human we work to minimize this function as best we can whether it helps us or hurts us.

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How to Keep a Trading Journal

Keeping a trading journal is a critical aspect of becoming a good trader.  You’ll never know what you did wrong unless you can objectively witness the prior trades you took; good or bad.  Then the next question becomes well once I’ve witnessed my profitable trade or error how I avoid it again?  We’ll chat about that in another blog called “How to practice trading.”

There are so many ways, tools, and programs that will help you keep a journal but if you are like me none of them really stuck or worked well for my day trading style.  After all, who has time to spill all their emotions, intuitions, and thoughts while trading?! Not to mention market conditions, entry & exit prices and who else knows what information may be relevant to your style.  To me text is dead in this case. It’s too slow and you have more important things going on than talking about your stupid feelings. 🙂

We are going to draw on integral theory’s quadrants to establish a methodology that will allow us to focus on all aspects of the trade.  You can do this with pictures, text or video.

How to create a trading journal.

Upper left Quadrant: What were the intra-day fundamentals. Essentially why were you looking at this stock? Did you get an alert? Did you see if pop up because of a signal from trade idea? Did your algo say, “buy here.”  Did they release earnings? Did they get an upgrade?   These are some examples of the interior aspect of a trade.  Think “why am I trading this stock.”

Upper Right Quadrant:  Essentially we are talking about Technical analysis.  Did it come into a supply zone? Did it make a head & shoulders top? Did it have a candle stick pattern you liked? Objectively, what was this stock doing? Chopping? Trending? etc

Lower Left Quadrant: This is where it can get tricky this quadrant is about shared meaning/value. An example of this is language.  I interpret this now as the sentiment of the stock.  What do WE, as a collective, believe about this stock? What do WE as a bull (or bear) believe about this stock?

Lower Right Quadrant:  Intersubjective.  Economic systems fall into this category, so would a mechanical failure on the stock exchange.  It can also be interpreted as: What was the market doing? How did the SPY or Oil or whatever market gauge you like to use, perform with your stock? What artifacts were left behind? Do you see a stream of red candles of green?

This would Look like the following:  You can either download a program like Greenshot to capture pictures from your screen and edit them (this is a free version of snagit) or write in a journal when you want. Displaying the picture will give you the best idea of how to review your trades using integral theory and create the trading journal that will hopefully make you a better trader.

Remember you want a journal that will cover all aspects of why you did what you did without taking up loads of your time.  You need the best information and I believe integral theory helps focus us to pull only relavent information.

As I continue my study of Integral theory by Ken Wilber my understanding of it changes.    This is, according to my understanding, is the first attempt to understand finance in an integral frame work.  This is Integral applications In finance.

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Charlie Munger – Cognitive Biases – Liking loving Bias

This is one of my favorites. When you hear a trader say, “I love this stock.” You know they are preparing themselves for distorted facts, ignoring reality and misinterpretation of the facts merely because of their affection towards the stock.

Yes, I said affection.  My belief is that similar to relationships we become married, infatuated, angered and involved emotionally with stocks.  The relationship can last for a couple hours (a fling) or for months, even years (marriage).  As you develop this relationship, regardless of time, you develop feelings.  You’ll hear this in traders talk. “I love this stock.” “I understand how it moves.” “I just get it with this one.”  Sound familiar?

It’s great you found your love and if it’s healthy, you’ll be profitable.  However, there are biases you will experience because you have developed feelings.

  • Not believing the pattern:  Your significant other always buys you ice cream after the market closes.  Last Friday they didn’t show up with ice cream.  You may dismiss this as an anomaly but the truth is your significant other meet someone else and will no longer be bringing you ice cream, you just have no idea.  Monday you wait, Tuesday… you get the idea. Mean while you’re pissing away money waiting for the same pattern to develop that is now gone.  Guess what. Time to move on.
  • Distorting Reality:  2 weeks go by and you are still trying to catch that same pattern.  It finally happens and you say, “omg yes finally, she’s back.” but it turns out they just had a fight and you’re still shit outta luck.  This also reinforces the operant conditioning that has been happening.  Your perception of reality is no longer accurate, you make allowances that you would not normally make because you have feelings.

Feelings aren’t all bad in the market but the right ones are key.  When “the stars align,” you just know.  It’s a gut feeling.  When you like/love someone or something your reality with it will change. It was an adaptation that was passed down.  It works evolutionarily that if someone in your party fucked you over but you like/loved them and needed their cooperation in the future… It makes sense that you should distort reality for the greater good that is your survival and continue to work with them.  However,   The superfluous feelings you develop for a stock that once made you money though deserves there rightful place in the bowels of memory.

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Charlie Munger – Cognitive Biases – Reward and Punishment

Incentives or rewards are powerful motivators for us.  They drive us to start & stop behaviors we enjoy or dislike.  This powerful concept affects us every day we trade both explicitly and implicitly.

Explicit incentives.  It’s very simple the more money we make the more we are incentivised to repeat those behaviors.  There is no boss that, says, “If you make double what you risked today, I’ll give you a 10% bonus.”  We do however, have a voice that tells us we’d be better off with more money

Implicit incentives: These, I believe, is what really motivates us.  Knowing that if you make more money you live a better life.  This illusion or fiction that you create incentivises you to make more money at trading.  This can be a dangerous path to take.  Because we may not be associating the correct behaviors with profitable trading.  A great counter example of this is over trading.  When we believe that trading for the sake of trading will yield a profitable result.  An example of a proper correlation with good profitable trading behaviors is typically, finding your patterns and playing those.

Let’s go Freud… The repetition compulsion.  You are not always rewarding your self with what is considered “good.”  You will see this with the popularized movie 50 shades of grey.  Being hit isn’t necessarily a “good” thing to most people but to some it’s rewarding.  The same thing can happen while trading.  If you have an underlying belief that, “You’re a bad trader,” or “I’m no good, i can’t do anything right.” You are rewarding the most powerful part of your brain (the unconscious)  every time you may a bad trade. You repeat this stressful pattern repeatedly, this is the repetition compulsion.  It’s my belief, that you repeat it, so you can become aware of it, so that you can have that cathartic moment to finally release it.  Sadly, however, this often is not the case.

Don’t ever underestimate the effects of rewards & punishment on your behavior.  They operate within and without our awareness.

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Intregral Theory – Market Algorithmic Development

Integral theory. Never leave home without it.  The new algorithm I’m testing is the 5-34 strategy.  I found it on a website a long time ago and the gentleman seemed to speak highly of it.  It’s a simple exponential moving average crossover strategy.  Before I go and tweak risk parameters, entry & exit locations, and overnight holdings I consult the integral framework.  Here is how.

Lines: What set of “skills” / Attributes does the stock need?  If we can define something as intangible as a “spiritual” line of development I can certainly define a volume line of development and a price line of development.  What attributes do I want this stock to have? High volume? Price great than $10? Strong beta? strong correlation with the sector?  All of these questions are valid as you do the same filtering when selecting a mate. Is she smart? Do they care for themselves, etc.

Levels: I sort of touched on this in lines by stating qualities of the lines such as High, low, medium, strong, and weak.  What level of development is the beta at? 0.02 or .95 beta?  How level of volume exists? Average of less than 1,000,000 or great than 10,000,000 on average?

States:  States are often temporary, and in my opinion, are expressed in terms of intra-day fundamentals.  Was it downgraded or upgraded? Did it just release earnings and is now in a state of frenzied buying? Are buyout rumors circulating?  These temporary bursts of volatility I  define as state dependent movement.  The stock will not move the same after earnings unless there is something that helps maintain that exuberant state.

Types: I define type as a sector.  Is it in the financial sector, technology sector, etc.  When someone asks “what type of stock it is” often people define it in a qualitative form.  Someone may ask “what type of stock is AAPL.”  “A technology company that makes computers…” a person may reply.  I don’t often hear people define stocks in terms of their lines & levels such as It’s an extremely (level) volatile (line) stocks.  They may go on to describe these attributes if asked for more information, but this is beyond the “Oh yes, Jerry is a nice person.”

Quadrants:  This section holds the bulk of my development.  We’ll go through each quadrant separately.  I have changed the order of the quardrants to make the most challenging one last (Upper-left).  We’ll start with the easiest, Upper-Right

  • Upper-Right: The external behavioral space.  How does this stock behavior.  Is it forming patterns? Does it respect those patterns? How does the stock move? Does it trend or chop?  In the upper-right quadrant, you can witness the behavior of the stock, it’s verifiable and real.
  • Bottom-Left:  What does the collective “us” think about this stock today?  I am going to repeat myself and say, does it form patterns & does it respect them. We must discriminate between these two statements in the different quadrants though.  When we look at at chart we can all see different patterns emerge, but the difference with the quadrant is do we as a collective agree that we see a head & shoulders or double top.  This is what will change the emergence of a pattern and it’s ability to fulfill it’s “destiny” from simply noticing their existence in the chart.
  • Bottom-Right:  The collective system.  Is the stock hard to borrow? Are there any regulatory or tax rules that impede or assist me trading this stock?  Are there any technology systems that I can take advantage of?  This section also holds the concept of relative strength.  Is this stock strong or weak compared to it’s sector and compared to the broader market.
  • Upper-left:  The internal space.  What does this stock think about itself?  This is a challenging conception. Does the stock even think?  I believe it does and here is why. As humans, we’re conditioned by the other quadrants to form internal conceptualization.  A “spoon” is not a spoon if we are never taught it’s a spoon.  So we can’t hold up a “spoon” and say, “it’s a spoon.” I believe the stock equivalent is the formation and fulfillment of patterns.  Since stocks can not speak (like animals) we look for patterns that define an internal state.  This dog has a wild temperament while this one likes to sleep & is very calm.  This stock is wild, volatile and usually, drops after creating a double top.  It has an identifiable unique pattern different from every other stocks.  The real philosophical issue with this quadrant in terms of stocks is that you can never enter someone elses internal state.  It’s sometimes impossible to know it exists since you never have direct access to it from an objective standpoint.  However, as humans, we can get close to understanding someone’s internal state and we call this concept integrity.  Are they telling me what’s really going on in their head?

As I develop the 5-34 strategy I will continue to post in more detail about how each of these is expressed in my code.

 

 

 

 

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Information Overload – An Integral Approach

In today’s society, we are bombarded with information. This is no different in the trading world.  Sqawk boxes, CNBC, Bloomberg, yahoo Finance the list goes on.  The world is so interconnected it’s difficult to spot why this setup works now and why it won’t work in the future.  For example knowing that the relative strength between the 10-year US bond futures was not able to make a new high in 2008 while the market did make a new high, signaled a top, however, this no longer works.

Integral theory is a beast if you want it to be and to mentally check off the 5 aspects is cumbersome, but I believe quadrants are the most useful when dealing with a lot of information with 4 very simple questions based on the philosophy of the quadrants.

  • Is this information going to change the behavior of the stock? (upper-right)
  • Is this information change the way WE as a collective view this stock? What are other people thinking potentially if they were already long or already short? (lower-right)
  • Is this information related to the entire sector? (Lower-right)
  • Will this change the stocks internal unique character? For example, will it trade less or more. (upper-left)

Information overload is a real issue.  Sometimes we get a piece of information such as, “Buy out rumor on TIF,” we rush to pull up the ticker and notice it’s spiking quickly, but if you take the time to answer the above 4 questions you’ll see how the answers may not invoke a buy.

 

 

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Integral Theory – Types

What type of trader are you? Long-term, multiday swing, intra-day, or ultra short term scalping?  There are many types of traders out there.  A more common frame of typing would be astrology.  Are you a cancer, libra, capicorn, etc.  These don’t necessarily tell you specifics about who or what you do but in society, but we generally enjoy typing ourselves.

How does typing yourself effect your trading?  When we categorize ourselves into boxes such as, “I’m a scalper,” or “I’m a swing trader.”  These conceptions put the focus on an ideology and not on your setups.  Let’s illustrate with an example.  Marvin always buys the 3 bar pull back on the 5 minute chart he watches daily.  However, the next day he see’s the exact same setup on a larger time frame but refuses to take this trade because he is a “day trader.”  It’s these ideologies that can make a trader focus on the wrong aspect of trading.

It’s not who you are (day trader, swing trader, fundamental trader) it’s what you do.  Why do you take these setups, what candle patterns, fundamentals are you looking for and how do you repeat them.  When you begin typing yourself; being a “day trader” filters trades rather than letting you setups dictate the filters.

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Integral Theory – States

Integral theory believes we enter different states of awareness, of consciousness, etc throughout any given day.   Have you ever been unable to break an angry mood? Your state was angry.  Have you ever been highly irrational for a long time? Your state was irrational.  Have you ever fell in love & were unable to fall out of it for a long time? Your state was in love.

States greatly effect the way we trade ever single day.  Author Denise Shull’s book Market Mind Games is essentially a book about emotional / psychology states.  Her book can be summarized as follows.  Be aware of your emotional context (state) it will greatly effect your trading decisions.  She’s correct.

This is a very basic overview of how states can effect you during trading.  Denise suggests writing down your emotional state as your are trading such as “I”m afraid to take this trade” or “If I lose on this trade I’m going to be very angry with myself.”  I added to this methodology by taking it a step further and after the bell has rung to go back and ask. What makes me afraid? or IfIi become angry with myself what would happen?

 

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Integral Theory – Levels of development in trading

To again, continue my series on how I use integral theory to trade the stock market we now move onto levels of development on each of the lines I discussed.

This is the piece of Ken Wilber’s theory that he “borrowed” a lot from other traditions.  Personally, I think this is one of the coolest aspects of his theories.  The book Integral Psychology does a great job mapping out how all these different theories of development are talking about the same thing just at difference stages in life.  I highly recommend the book.

How do development lines work?  If you ever heard of Freud’s psychosexual stages of development that is a developmental line.  Another example is Piaget’s stages of cognitive development.  The most popular set of development stages within the integral framework tends to be spiral dynamics.  This is metaset, in my opinion, of development that can be applied to any line.  I’ll illustrate an example below.

The Line of development will be pattern recognition.  The development stages of pattern recognition could be interpreted as follows.

Beige – Instinctive / survivalist: Reading books on technical analyse & finding patterns that match exactly what you have read.

Purple – Magical / Animistic: Believing you see the patterns in everything.  The street lights form a double top and every time frame you look at hold exceptionally strong cup & handles, for example.  You find a “holy grail” of patterns

Red – Impulsive / Egocentric:   The patterns no longer work and you are angry. You find failing example after failing example.  The belief in the “holy grail” has died.

Blue – Purposeful / Authoritarian: You seek more education believing someone must have the “holy grail.”  You take this person or educational doctrine word for word.  You start to relive the “holy grail” experience that you originally had but it is now done with a stronger authority figure.

Orange – Achievist / strategic : Acting in your own self-interest.  “This guy doesn’t know what he’s talking about but I do.”  This is where you may begin to turn heavily towards statistics to validate your patterns and see how often they do work.  You will turn to more scientific methods.  [Side note: this orange phased is theorized to have only begun 300 years ago]

Green – Communitarian / Egalitarian:  Seek peace with self & others.  You now realize you know what you don’t know and don’t know that which you don’t know.  You have accepted the idea patterns work and patterns fail. That there is no holy grail.  You may even begin to share your knowledge with others.

A picture below should help bring these ideas together.  Remember moving on to the next level does NOT mean you are no longer part of the lower levels.  As you transcend the previous level you include you! You never disregard the previous levels.  Even though you may recognize patterns at a “Green” level of development, it doesn’t mean that “beige” is no longer a part of you.

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