You Process Information Influences Your Trading Results
Van K. Tharp
a trader part of your challenge is that you must make decisions
based on a large amount of information. Thousands of volumes have
been written on how to analyze the vast amount of investment
information available. Few investment authorities will admit that
most of this information is of low quality and has little predictive
value. Since investment information is of such low quality, mental
strategies (how you make decisions) become especially
important in determining the profits or losses that you will
give you just a little insight as to what I mean about how we deal
with this information in our decision making process, let me share this
information from the Second Edition of the Peak Performance Home
Study Course (which we will be releasing soon).
as a Concept
a child when we first learn a language, we ask mom, “What is
that?” Mom might say,
“It’s an apple.” And
then the rest of your life you relate to each apple, not through a
direct sensory experience about the apple, but by the word
mom said, “That’s called an apple,” you might be a little more
inclined to have a sensory experience of an apple.
But typically Mom says, “That is an apple.”
And you accept her word for it.
And even when you eat an apple you don’t really experience
the apple. Instead, you
just swallow something and say to yourself, “That was an apple.”
And that’s quite different from being in the present moment
with an apple.
market is even more indirect and full of concepts that you don’t
really know or understand. You
never really have a direct experience with a stock.
Instead, you see quotes on a computer, bar charts, and a
place on your computer screen where you can fill out some
information and open a position.
You can never directly have an experience of that stock.
all day long we are basically dealing with concepts flowing through
our heads, not having a direct experience with anything.
And the market is probably as indirect as anything.
head is probably filled with chatter.
And most of it means very little.
For example, let me stop for a minute and give you a running
commentary of what’s flowing through my head:
now you’ve done it, what are you going to say?
And I probably had something important right there, but now
thinking about it, I don’t know what it is.
He’s in my head. Boy,
I’m feeling sleepy. OK,
a minute is probably up.”
that what I said is mostly junk, but it’s actually what I said to
myself when I recorded my thoughts for about a minute.
Psychologists estimate that about 80 - 95% of the information
we pay attention to in our heads is total junk.
It doesn’t mean anything and it is repetitive.
But for most people it is still the reality to which we give
let’s see. What do we
know now? Our thoughts
are mostly junk concepts that we mistake for reality.
And our only exposure to the markets is through vague
concepts that just add more junk into what’s going on in your
head. And it’s
what’s going on in your head that you really trade (i.e., your
beliefs)—not the markets!
means that traders do not have direct sensory feedback about their
trading performance. Typically,
investment information is delayed and transformed through many
levels of coding. For
example, when a trader opens a position in the market, he does not
get immediate sensory feedback about the investment.
Most investments are traded symbolically.
Typically, you might get a computer confirmation from your
broker. You enter the
order in your computer, it’s executed, and you get a summary
statement of what happened.
Basso (of New Market Wizard's fame) did a study in which he estimated
that it took 2.5 minutes total elapsed time for him from the time he
saw a signal on his quote machine in St. Louis to the time an order
was actually executed in Chicago or New York.
A lot can happen in 2.5 minutes.
That was about 15 years ago, so you may be able to do it
faster with today’s computers and the Internet.
But the amount of information you have to deal with has
probably doubled in the last 15 years as well.
making an investment decision, the trader may get a verbal
suggestion from someone, read a newspaper article or a newsletter,
call into a hotline service, or study arbitrary visual
representations of the investment’s history (called a daily bar
chart, a financial report, etc.).
Some investors receive price quotations at their computer via
phone lines and then transform the information via computer software
into arbitrary transformations known as bar charts, moving averages,
oscillators, Market Profile®, etc.
Thus, most of these sources of information are coded and
recoded many times and are, at best, far removed from the original
people who work on the floor of an exchange get second-hand
information, since the only information available is symbolic (e.g.,
verbal, written, or hand signals).
Investments seldom change hands on the floor of the exchange.
They are simply coded in log books or computers as having
changed ownership. Direct
sensory feedback, the highest quality sensory information, seldom
exists for traders.
I only know of
one example of traders receiving direct sensory feedback.
Some floor traders on various exchanges use noise level as a
system for trading. That is, they use the amount of noise on the
floor as a signal for action. When
the noise level on the floor is high, they become suspicious of what
everyone else on the floor is doing and if the noise level later
becomes quiet, they go against the crowd.
But floor trading is quickly disappearing in favor of
electronic market making.
There are many
other aspects that go into how we deal with trading data. There is an aspect of responsibility that is
important. I also teach internal representation and how that affects
the way you view market information. It is also important to
understand how you produce your internal models and the structure of
internal information. However, this is extensive information, which
is covered in an entire chapter of the Peak Performance Home Study
How we process
information can have a huge influence on our trading results because
we use that information to make trading decisions. When you are
studying the market and making your plans for trading ask yourself,
“What does this data really represent? What does it really
mean to me and how does it help me meet my trading objectives?”
Just a little shift in your thinking can sometimes go a long
way toward understanding yourself and your objectives better. And in
my opinion any advancement in the understanding of one’s self is
an advancement in your trading.
Van Tharp: Trading coach, and author, Dr. Van K. Tharp is
widely recognized for his best-selling books and his outstanding
Peak Performance Home Study program - a highly regarded classic
that is suitable for all levels of traders and investors. You can
learn more about Van Tharp at www.iitm.com.