too smart for its own good

  1. 4,086 Posts.

    I posted this on another forum where geffa saw it and suggested that it may be of interest to HCites also. So here it is.

    Rather than change it to remove the contextual references I'll post it as-is and allow you to imagine the context. Feel free (of course) to disagree, after all it's only stuff from my head.

    Very thought provoking. Touches on some of the issues that have been percolating through my mind. The distinction between the biological brain and electronic "brain" is an interesting approach to describing "the trading problem".

    It is partly for the reasons that you have stated that I find myself (after wandering for several years in the wilderness) drawn to mechanical trading. Personally, mechanical trading fits my mindset, however I am not arrogant enough to rubbish other methods of trading. After all, we all know that no matter how much you "proove" a mechanical system and even if you provide it for free to others, most people will not succeed with it.

    Anyway, for me, I see the use of the bio brain in developing the system - this is where some judgement can be applied and decisions about a path of investigation to follow can be made, sometimes even based on "a feeling" or "a hunch". The computer has a role here purely in computation (backtesting).

    Actually running the previously tested system then becomes purely mechanical (!) and is well suited, once again, to being assisted by dumb computational power.

    I believe in the above scenario, for me, for a simple reason - the human brain is too smart for it's own good. There are many ways in which this can have a negative impact on trading.

    - Charts. This is my big bugbear. Now that we all have a PC (or two) on our desk and easy access to charting programs and data, everyone wanders around waving extremely detailed charts. The problem as I see it is that the human brain is exceptionally good at visual skills. The human brain is geared up to make sense of chaos (think about inkblot tests). Even is there is nothing there then the human brain will find what it is looking for. Patterns in charts are particularly obvious here. I am certain that many of us have looked at a chart and (sometimes subconscously) made a decision because we see a pattern forming that is a repeat of an earlier one. This behaviour has even been formalized in the form of support lines, resistance lines, fib levels etc etc...

    - Reinforcement. This may well be the worse one of the lot. Human nature is to want to be right. This is the tendancy that we have to use whatever evidence we can to be able to say that we are right on a trade that we are in - even if it has gone against us. This is tied up with ego and is why so many people know about stops but let their trades blast straight through them (I am right, the rest of the market is wrong and it will turn). Removing this ego from the trading equation is easy to say but hard to do - it is. If the ego (the need to be right) is the driving force then the brain can pretty much take any evidence available and arrange it to justify a position.

    - Overcomplexity. The human brain is an extremely powerfull device and likes to demonstrate that. This is done through developing the belief that more complex is better. however, just because the brain can come up with more and more complex ways of dealing with a situation does not mean that those methods are better. In my own experience I have, a number of times, followed a path of some form of TA only to have to hit myself on the head every so often to wake up to that fact that I am just adding more and more complexity to a system that either did not need it in the first place or was never going to really work, anyway. I have a friend who has not backed away from this and he has developed a system over the last couple of years. Everytime he shows me his system he has added another indicator in an attempt to either improve or correct the system. The system is now so complex that I certainly cant understand it (and I wonder if he can). I am sure that many people are surprised at exactly how simple the OTTRs were.

    - Wrong Taget. This is an idea not fully formed in my head but one that I have started thinking about since becoming involved with this (excellent) forum. This comment applies to some of what I see on this forum but I am not trying to be rude - just giving my perspective. For me, the target is making money - not developing systems. I am a programmer by trade and like many here get a certain amount of enjoyment from designing and implementing computer systems. Fortunately, my work has always been in commercial environments so I have developed (mostly) the ability to ensure that the target (getting the job done) is not overshadowed by the enjoyment of meeting a challenge. (I have seen numerous computer systems that have never reached production primarily because they have been overscoped and not managed towards a practical target). I have seen sevearal refernces in the forum to "pulling the trigger". I just sometimes wonder if some potential traders get more involved in developing YABS (yet a better system) and never actually pull the trigger. Of course that may not necessarily be wrong. After all, we are on this earth for a limited time and how we "get our kicks" is different for each of us. Ie. If your taget is to get the sense of joy and happiness that you get from developing and refining a system then be sure that you know that.

    I'll leave it there and hope that my thoughts are of some interest.

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