I explained how often the logic we apply to the market is rarely fully formed or complete. If we wait for completion of the logic, the market has usually moved to discount it. Thus, often we must make a decision based on incomplete information.
'Often we must make a decision based on incomplete information.'This is challenging for many, but it can also often is the best time to trade. - At this stage, the market has yet fully moved to price in new ‘value factors’, thus the risk/reward for an idea may me much better.
Equally there is a risk that the picture we see forming may be false. This is why, in my opinion, great traders, are often ‘Masters of the Best Guess’.
The Human Mind and Best Guessing
Making a best guess is extremely challenging. The human mind dislikes incomplete pictures made from a few basic focal points and often seeks to complete the picture based on previous experience.
Our minds seek extra insight to complete an incomplete picture or story. However, often it does not have the time, data or resources available to do this. What it therefore does is fill in the gaps to allow us to make the best sense of what we can with the information we have.
The danger is this can undermine our vision and our perception can become easily distorted. The narrative may be correct, but equally it may represent a logic based on a false premise used to justify a ‘feeling’ based decision, or a decision not necessarily based off clear logic (Which abstractions often are).
I confided in my client that when I was a trader, this happened to me on many occasions, and sometimes seriously sabotaged my trading.
I shared an example with him from my own trading: Bizarrely the example I shared with him was one that turned out to be a successful trade.
The rationale for the trade was based on a technical set-up, however once the trade was in motion, I then started to form fundamental narrative which fitted with what was happending. The logic-based narrative which I constructed was based on a macro-economic fundamental case and turned out to ne completely wrong. It was not relevant however as the trade had been extremely successful.
The discussion with my client continued and my client raised the famous trading mantra; - ‘Trade What You See, Not What You Think You See’.
The challenge in markets is that 'what we see' is rarely is, if ever, a true and complete image. Rather it is a pieced together image based on templates from experience. This is how the brain works.
'The challenge in markets is that 'what we see' is rarely is, if ever, a true and complete image.'Optical illusions provide good examples of this:
In the image below the squares marked A and B are identical in colour and shade. However, your brain is not seeing this because it expects something different given the checker board pattern and the shadow cast by the green cylinder.
Your brain is telling you that square A and B are different colours.
No matter how hard you stare at them, whilst they remain in this format, your brain will not allow you to see the truth. You may wish to go to this link explains this.
Or watch the video below.
Another excellent example, which I think provides a better metaphor for markets is this image:
Markets never show us a clear and logically constructed picture. There are just too many variables, different views, vistas, and possibilities. We are therefore left making ‘best guesses’, whether we like it or not.
Your Job as a Trader is to Master Guessing.
Thus, your job as a trader is to become the master of playing the ‘best guess’ game.
It is for that reason we need to have checks on our behaviours, on our optimism and pessimism, on our own arrogance and on our levels of confidence.
It is why we need some sort of process and structure to our trading, our analysis, our trade management, and the juxtaposition of all the aspects.
'Your Job as a Trader is to Master Guessing.'Summary
We cannot help ourselves as humans in applying logic and rationalisations to fill gaps in data or to try to explain data or events, it is how we work. This is both our blessing and curse.
This is why the concept and idea of 'Behavioural Trading' is so vital to learn to succeed as a trader or an investor.
Behavioural trading is about mastering the 'Inner Game'.
The starting point is greater self-awareness.
Greater self-awareness, means understanding the basic drivers of your decision-making and behaviours, developing an understanding of who you are from a ‘third person’ perspective, and being conscious of how your emerging situation impacts your behaviours and actions.
As you become more self-aware, so you should be able to start capturing the upside of your capabilities more effectively. You should also become better at limiting the downside which results from some of the negative aspects of how we function.
This is why we believe 'Its not the Markets You have to Overcome, Its Yourselves'.
This will enable you to more effectively develop the skills need to ‘Guess’ successfully.
This is what will help you to increasingly become a master of the ‘best guess’.
This will enable you to more effectively develop the skills need to ‘Guess’ successfully.
This is what will help you to increasingly become a master of the ‘best guess’.
It is why I firmly believe that your success as a trader or as an investor does not come from learning to beat the market, it comes from learning to beat yourself.
*The cross-section of speculator skill: Evidence from day trading: Barber, Lee, Liu, Odean: Journal of Financial Markets 18 (2014) https://www.sciencedirect.com/science/article/abs/pii/S1386418113000190
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