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[r.dryden] 08/6/2003 12:45

Great stuff DB!
Out with all that Elliot wave and Fibonacci stuff then.

[jdeltablues] 07/6/2003 22:52

As a change from the mystical, intuitive Eastern philosophy, here's a bit of analytical, rational Western philosophy.

I'm currently reading "I think therefore I laugh" by John Allen Paulos.

It isn't in the ADVFN bookshop, though they do have two other of his books (though surprisingly not the one on the stockmarket). It's an attempt to introduce some of the ideas of mathematical logic in a relatively painless way. Anyway, the section on assumptions struck me as having some relevance to trading.

'Martha and a big dog are standing at a bus stop. Waldo approaches them and asks her if her dog bites. She assures him that her dog is very friendly and doesn't bite, whereupon Waldo pets the dog. The dog bites his arms and legs and thoroughly mauls Waldo, who screams at Martha, "I thought you said your dog didn't bite!" Martha responds quite innocently, "Oh, that's not my dog".'

How often do traders get mauled by making an assumption about the market which looks perfectly reasonable but turns out to be completely wrong? I've got quite a few scars.

The only assumption you can make when you can put a trade on is that this particular trade will not work, your stop will get hit, probably with a bad fill, and X pounds will disappear from your trading account, which will go down to Y pounds; anything better than this is a lucky bonus. BUT if you apply your system consistently, you will have enough winners to more than make up (and this trade could be one of them) and your account will grow in the long term. Assuming your system is any good, that is - and if it isn't, why are you trading?

'Waldo asked his doctor how to improve his relationship with his wife. The doctor advised him to take a ten-mile walk every night so he wouldn't be so irritable, and to call him in a month. When Waldo called the next month, the doctor asked him how things were with his wife. "Fine, I'm very relaxed, but I'm three hundred miles from home!"'

If you use some kind of indicators, are you absolutely sure you're using them the way they were intended to be used? Don't make assumptions, go back and check (from as close to the source as possible) what the author meant. You may well be surprised...

[Ptolemy hypothetised that planets travelled in circles. After all, planets are in heaven, the circle is the most perfect geometrical shape, and everything's perfect in heaven, so they must, right? Unfortunately, more accurate measurements showed that the orbits deviated from a circle - but no problem, his followers just added "epicircles", circular deviations from the original circular orbit which explained the discrepancy. As the centuries went by, more and more had to be added, until some planets had 50 or 60 epicycles. Eventually, in the 16th century, Tycho Brahe showed that planets moved in elliptical orbits, thereby demolishing the epicycle theory in one fell swoop.

Occam's razor is "entia non sunt multiplicata", which roughly means "don't make any more assumptions than you need to solve the problem"]

'Once entrenched, theories can be difficult to displace. Just as Ptolemy added epicycle to epicycle to save his theory of planetary orbit, people tend to embellish and embroider and barely serviceable theory and often prefer such baroque theories to simpler ones.

'Dr Paul Watzlawick (1977) relates a story about a relevant pieve of research due to Professor A. Bavelas: Two subjects A and B are asked to try by trial and error to recognise the difference between healthy and sick cells. They can only respond "Healthy" or "Sick" to the slides that are shown them. They are told that a light will signal when they have answered correctly. In fact, however, only A's correct responses are always greeted by the light signal. Unknown to B, who is seated across the room (and sees the same slides in the same order), B's responses are greeted by the light signal only when A responds correctly. Whether B answers "Healthy" or "Sick" has no effect on the reinforcing light signal that he sees.

'Afterward, when asked to explain their "theory of healthy cells", A's theory is simple, concrete and straightforward. B's ideas, on the other hand, are complex, convoluted and elaborate. Most surprisingly, A is impressed by the "brilliance" of B's theory and in a subsequent trial does considerably worse than in his first trial, presumably having been influenced by B's abstruse (Ptolemaic) ideas.

'Of course, no formal research is needed to note that, everything being equal, people are often more impressed by mumbo-jumbo that they don't understand than by simple observations and deductions that they do understand. They prefer hairy hypotheses to shaving with Occam's razor.'

Morale: keep it simple, stupid. The more complex your system is, the more likely it is that you won't apply it correctly, or even not understand how to apply it. Not to mention the possibility it's more likely to be wrong (eg over-optimised).

If you have a system that is simple and works, what more do you need? Don't be swayed by pundits, the news, friends, other traders, NEW!! and improved(TM) charts with esoteric squiggly lines on them that call every bump in the road (with hindsight). Find the simplest possible system that works for you and stick to it. Make your own observations and have confidence in them.

(Sorry, didn't mean this to turn into a sermon)

[energyi] 14/5/2003 13:09

I also read that book when I was taking
Dan Goleman's course on meditation in University.
(Goleman later wrote a famous boo, "Emotional Intelligence")

I remember it, and recommend it

[jdeltablues] 14/5/2003 13:05

Another one for the bookshelf? Taken from Ed Toppel's samurai trading letter. Unfortunately the ADVFN bookshop doesn't seem to have this one (yet?).

Zen in the Art of Archery--My All-Time Favorite Trading Book
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Zen in the Art of Archery is the book that inspired me to write Zen in the Markets. Although it has nothing to do with trading, it does. Eugen Herrigel, the author, was a German philospophy teacher living and teaching in Japan when he took up the art of Japanese Long- Bow archery. The book describes his inner processes as he attempted to learn this art.

I read it when I was in college years ago--too many years ago--and later in life reread when I first became a professional trader. I was struck by the number of similiarities in the process of becoming proficient as an archer as there were in becoming a good trader. This book inspired all the other Zen in the Art of books that are out there. I have read it more than 20 times and continue to get something new out of it.

[energyi] 13/5/2003 22:42

"Money is better than poverty, if only for financial reasons". (Woody Allen)

[jdeltablues] 05/5/2003 21:46

Found this reference to Plato's Apology in one of the Daily Reckoning guest articles (I've snipped out the bit where he lays out his fundamental rules for stock selection and plugs one of his pet stocks as they are not relevant to this thread).

THINKING SMALL
By C. Alexander Green

The world's greatest investment book was written in 327 BC.

Nothing by Warren Buffett or George Soros or Peter Lynch
has ever surpassed it. And though it was published a couple
of millennia before the founding of the London Stock
Exchange or the Chicago Mercantile, it contains the
essential key to making a fortune in today's financial
markets.

The book I'm referring to is that dusty classic from your
sophomore year, Plato's Apology. Socrates, as you may
recall, was on trial for corrupting the youth of Athens.
During his defence, he explains how he tried to disprove
the oracle at Delphi, who proclaimed that no man in Athens
was wiser than Socrates.

Baffled at this revelation, Socrates confessed that - with
his meagre understanding - he could not possibly be the
wisest in the land. And so he set out to visit a local
sage, one of the greatest scholars in Athens:

"When I began to talk with him, I could not help thinking
that he was not really wise, although he was thought wise
by many, and wiser still by himself; and I went and tried
to explain to him that he thought himself wise but was not
really so; and the consequence was that he hated me, and
his enmity was shared by several who were present and heard
me.

"So I left him, saying to myself as I went away: I am
better off than he is - for he knows nothing, and thinks
that he knows. I neither know nor think that I know. In
this particular, then, I seem to have slightly the
advantage of him. Then I went to another, who had still
higher philosophical pretensions, and my conclusion was
exactly the same. I made another enemy of him, and of many
others besides him."

In the end, Socrates discovers he is indeed the wisest man
in Athens...simply because he realises the limits of his
own knowledge. In short, knowing what you don't know is the
very foundation of investment wisdom.

[energyi] 13/4/2003 00:05

WHAT IS ENLIGHTENMENT?

Nothing more than a state of acute awareness.


We are all enlightened beings. But we BLOCK our awareness, by being distracted
by needs and desires, and the swirling energy of hopes and dreams.
Only by learning to ignore those distractions, and robbing them of the energy they
consume, can we gain freedom from desire and experience true awareness.

At Moments AWAREness pops through...

...CAN YOU SEE the blocking action in the photo?
Does it look like a Hand to you?
If so, is the blocking happening in the right direction?
Or is the blocking action having an unintended effect?

[goldstrike] 12/4/2003 14:44

dont know if this is really useful for the thread but a useful thought that i keep in mind when trading,

the socratic disavowal of knowledge

"Is there not here conceit of knowledge,
which is a disgraceful sort of ignorance? And this is the point in
which, as I think, I am superior to men in general, and in which I
might perhaps fancy myself wiser than other men, - that whereas I
know but little of the world below, I do not suppose that I know"

spoken 2,500 years ago but nonetheless as relevant today, you are wise to the extent that you know you know nothing important...

for anyone interested in reading the full text

[random] 25/2/2003 12:11

j,

that was a fantatstic link ....

in particular the explanation that the "observer position" is an optimal psycological state to trade from.

"The observer position is that of a neutral observer, a fair witness. This is a dissociated position. Here you watch yourself and the other person. Here you are in the role of a spectator as you listen to yourself and the other person. As an observer you'll have a third party's commentary. This gives you an impartial view, but if you stay here too long, you could end up playing the role of the cold fish.

...

By going to the observer position, you can gain perspective and neutrality. Some successful traders move to the observer position when they put on a trade. If you're getting too involved in a trade, move to the observer position and look at it from that perspective. At the end of a given trade or at the end of a trading day, take a look at your trading from the fair witness position."

[jdeltablues] 21/2/2003 20:37

Some interesting articles about trading psychology here (towards bottom of column at RH side):

[energyi] 15/2/2003 18:43

Recycled from another thread:
Human nature will lead you to trade with the crowd, because it feels
more comfortable to run with the pack. It is the lone wolf that makes money
in the market, and/or the leader of the pack.

Those at the back get crushed when the tide turns

[energyi] 31/1/2003 00:08

"Sliderisms":
"Don't get fooled by the fundamentals" and
"Trade the traders"
:SOURCE:

[harvester] 27/1/2003 21:04

Thanks. Let us know when you do . From your reply I gather that they have not yet rolled it out nationally .

[energyi] 27/1/2003 20:57

H.
I am aware it exists, mostly in the City of London.
But I have not tried it yet

[harvester] 27/1/2003 20:48

energyi:
U R turning into a philosopher as well as a poet and share trader .My compliments.
BTW: can you provide some info on the HI WI internet access which is said to be available at starbucks coffe shops, I read. Cost? Ease of use etc , please.

[energyi] 27/1/2003 14:35

Bob Kincheloe & Ike Iossiv...
interesting chat on the DANGERS of MPT and asset allocation,
and the stupidity of "buy and hold":


Ike:
"I never worry about MISSING SOMETHING...
but I do worry about something which MAY NOT MISS ME"

[energyi] 30/12/2002 14:33

this thought emerged spontaneously today while having a chat
over coffee at starbucks:

HAPPINESS IS NOT a Full Reservoir,
it is a half-empty Reservoir
with a HEALTHY GARDEN around it.

Good Luck to everyone in 2003

[r.dryden] 24/12/2002 00:51

deltablues,
Re Zen: this link is in the header.
Quite interesting - they discuss price as the only thing to watch.

Zen in the Markets (by Edward A. Toppel):

[deltablues] 24/12/2002 00:09

Energyi, I don't agree with it either, I was just being provocative :-)

IMO each price represents a decision that two traders have made, and price movements are the result of one side being keener to act on its decision than the other. Price movements can only be random if traders are making decisions at random (in the aggregate, that is, not individually!); what appears to be random on one time scale often turns out to be significant on a different time scale. For example, a strong end of day rally will be lost in the noise on a weekly chart but will look really impressive on a 5-minute chart. Similarly, individual ticks may look random but fit neatly into a pattern that is evolving on a larger scale.

Anyway, the point was that stripping out the inessentials can be beneficial. The provocative statement was a feeble attempt at a koan, like the stories which involve slapping the Zen master or killing the Buddha, where something which is "obviously" wrong or illogical shocks the reader into looking at things differently.

Does anyone have any good general links on Zen as this is something I'd like to look into more deeply?

Interesting about someone going from Physics to hedge fund management. I did a Physics degree (at Imperial College, London) and couldn't imagine any of the staff as successful traders! Did he move into trading from something he found in his research - signal processing and thermodynamics seem fruitful areas for this?

See for a signal processing approach.

[energyi] 22/12/2002 19:33

I was speaking to a friend of mine this weekend,
who is a former professor of Physics at MIT and is now a successful
Hedge Fund manager. He remains a big sceptic on ...
many of the technical tools I use successfully in everyday trading.

A good example of his scepticism came on Thursday night, when I delayed
a meeting because I was waiting for 7pm and a possible drop into a Full
Moon low. When it happened, as was followed by a bounce on Friday he wrote
it off as an accident. He said it is lucky that others believe in magic,
so he can trade against them. I said I am happy with magic as long as
it makes me money.

[energyi] 22/12/2002 19:21

Delta,
I dont agree that prices, or the market is fundamentally random.
But I do agree that you need to approach the market with humility,
as if at any time "anything can happen". And while "anything can
happen" there are still moments where the chances of getting a big
move right are higher than random chance... and/or there are times
where an almost even chance can be taken with tight stops and the
potential for a large move if you choose the right direction.

Those are the windows I seek

[deltablues] 22/12/2002 19:12

Following the theme of "less is more", some provocative thoughts from Robert Buran:

QUOTE
Price movement is predominantly random, i.e. not 100% random, but predominantly random. The "secret" to making money in the market is locating that small portion of market behavior which is not random and exploiting it. I do not feel that conventional technical analysis is of any value in doing this. The problem with technical analysis is that it will present the illusion of uncovering hidden relationships between price behavior and various indicators.
I would submit that all such indicators are as random as the price behavior they attempt to predict and that all profits and losses realized from trading such indicators will be randomly distributed.
ENDQUOTE

More at

[r.dryden] 22/12/2002 02:24

db,
No, but I intend to soon.
No support/resistance, indicators, just price.

Hmm...Interesting.

r.d.