Mastering this technique can improve your trading
I had the pleasure of teaching a course session for the Chicago
Mercantile Exchange’s education department. If you have the
opportunity to visit the Merc’s library and Globex Learning Center or attend one
of their many courses taught by recognized industry leaders, I heartily
recommend the experience. Their commitment to education and training is
extraordinary. Where else can you find a room with a bank of computers
with market simulations, the latest trading software, and staff available to
help you with developing your trading?
One of the themes I touched upon in the session was the importance of pattern
recognition to trading success. Whether traders focus on chart
configurations, technical indicators, or shifting bids and offers from a Level
II screen, they are extracting patterns from markets that are associated with
future price movement. Much of trading expertise consists of seeing so
many variations of these patterns that they become internalized, creating a
“feel for the market”. My statement to the class was that
success in electronic futures trading is less about personality traits than
about screen time. Traders need to see enough examples of patterns to
create what psychologists call “implicit learning”. This is the
learning that characterizes athletes, fighter pilots, chess masters and other
trained professionals. A hallmark of implicit learning is that the
performer’s knowledge cannot be verbalized and yet can result in expert
performance.
Two factors hinder the acquisition of expertise among traders:
1) A lack of screen time – Traders who watch markets on a
part-time basis or who attempt to trade without live data feeds cannot possibly
cultivate the intimacy with patterns that are characteristic of full-time
traders who actively view and review markets;
2) Information overload – Traders who watch too many patterns
run the risk of internalizing none of them. Research suggests that a high
level of cognitive focus is needed for implicit learning. By jumping from
chart to chart, indicator to indicator, traders create what researchers call
interference effects. Information obtained before and after the occurrence
of a key pattern interferes with the processing and internalizing of that
pattern.
There is much to be said for advice to maximize screen time, but focus on a
small set of core, tradable patterns. The past couple of days, my
free website has focused on patterns in intraday measures of new highs and
lows among stocks. Having kept these data for years, I am familiar with
their behavior during breakouts, reversals, and trending days. No doubt, I
could have acquired a similar intimacy with a different indicator. No
market measure can eliminate the uncertainty inherent in markets. Less
important than the specifics of market indicators and chart patterns is the process
of observing and internalizing these over time. Of all trading mentors,
repetition is the best.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com.