Category: Market Psychology

Lines, so many of us choose them regularly without a thought. It feels so natural, almost instinctual. Why we would question it? As traders, we must create structure out of chaos. To create probabilities out of what appears to be impossibility. You’ll never know how much lines shape your action until you commit to one, only to see another after the fact.

The example is TSLA, but I would prefer to whelve into high waters more quickly. The procellus existence of man leaves him austere and vulnerable to the elements, his society, and even those he may deem his family & friends. He is forced delineate, to draw what may be arbitrary distinctions to some greater “God” or Universe that finds it equally justified, perhaps even satisfying, to shine its sun equally upon the murderer & rapist as it does the philanthropist & good samaritan. I find no issue with the categorization I just created, the lines I have drawn between Evil & Good. Though how did I draw them? Why did I draw them the way I did? Why do you?

The lines touch us in every aspect. Whether you’re a first-year Ida Rolf student learning that the body, through tensegrity, coordinates its complex procedures and structures its mountain of flesh on a single line not readily visible but undeniable in existence through the crown of the head straight down. The line touches us in our prejudice towards political parties. If we are not to vanquish the other side we may succumb to there rules, morality and lose what “progress” we have made. The line touches us in our friends, our family, our group, our country. One walking mound of flesh, regardless of race, color, or creed. The universe makes no distinction between who flourishes, who dies, and who gets to tell its history. But we do. Would the “white” English men have done better than the “blacks” in Africa if there geographical “destinies” had been switched? The line touches us for mating purposes. They are roughly logistical regressions, the answer is yes or no, 1 or 0. An untested formula used to predict your future happiness and ability to pass your genes on. “Tall men only please.” “She better be hot.” As though these lines prevail in an American society whose divorce rate is near 50%. History is a great comedian. Even the modern philosopher Ken Wilber has created 5 lines: level, lines, states, types, and quadrants. For sure his theory rules all the lines as is the point of most meta-theories. Even I am guilty of there creation. As the distinction between man & the universe we live in seems to be mutually exclusive & stoic.

The line touches us in to many aspects to list. In TSLA the downward trend line was violated as a short position was accumulated, before falling again. The line history deemed most appropriate was not the one I used. Though I was firm set on believing I was correct without re-thinking, without checking back into the annals of history to see where my folly truly lie.

So I ask you, where are your lines? Why have you drawn them there? What purpose & benefit have they served in mitigating your risk and maximizing your growth in economics, in morals, in choices, and in character?

Hoarding isn’t just a problem for people anymore. I believe this pathology extends to companies as well.  It may even be at clinical levels given how much data they are acquiring but potentially not even using. That my friend, is hoarding.

It is estimated that google has 10 exabytes of data that’s 10 million terrabytes.  A common hard drive at home holds 5 terrabytes.  GOOG

Walmart is estimated to process 2.5 petabytes of data an hour.  That’s 360 petabytes a week or 360,000 terrabytes.  WMT

Even the U.S. is believed to be storing up to a yottabyte of data with it’s new NSA facility.  Which is 1,000,000,000,000 terrabytes.

That is a lot of data.  The true sign of a good hoarder is whether they are unwilling to part with items they no longer use.  In my opinion, I doubt any of these tech companies would delete old user data, location statistics, or any data that could be potentially profitable someday.  That’s the key word COULD.  I’m no psychologist but I do believe these companies have a pathological relationship with their data. They are hoarding it.  It no news that google is now the largest buyer of magnetic tape.  Why? To save all the data! Magnetic tape is to slow to read so why keep it? Because they are hoarders.

I’ve been listening to a lot of Allan Watts lately.   He is largely accredited for bringing eastern philosophy into to western society in a highly digestible way.  What I want to focus on is knowing without knowing.

As a trader we spend hours scanning charts, searching for the setups we know best, that we know have a high probability of reward.  Though if it was that simple we would just automate what we do and sit at the beach all day.  There is something more I believe.

There is a feeling that occurs, a knowing.  You look at the chart and you know what it will do.  As if you have some sort of pre-cognition.  What is this? As if the stars have aligned and you somehow intuitively know.  When your brain kicks in you may second guess yourself, change your mind, look for evidence to verify this feeling but you know what you know.

The mind, however wants to make up a story about why you feel this way.  It is pointless.  Just as fire does not burn itself, nor does a knife cut itself.  You will not know what you know by logic, thought, or evidence.  You just know…

How often do you feel this as a trader?  What do you do when you have this feeling?  Do you journal it? Do you always take the trade?  Keeping track of these moments is critical in my success because there is a high order knowing I believe that I do not have access too directly.  Perhaps over time with enough sample, I can begin to understand what I do know or at least plug it into a deep learning model 🙂

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.

 

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.

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.

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.

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.

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.

 

 

 

 

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.