Trading And Reinforcemnt

BLACK BOX THINKING AND TRADING

Just finished reading “Black Box Thinking” from Matthew Syed and I wanted to share some key takeaways and how the experience has helped me develop into a better trader. How to embrace failure and use it as a learning experience and why Elite traders have more in common with Airline pilots whilst amateurs and retail traders are more in line with medical thinking and attitudes towards learning. Doesn’t sound that bad does it, I hear you say, doctors, medics, but there is a fundamental difference in these two professions that makes all the difference between winning and losing consistently.

Learn from mistakes

“The difference between science and previous ways of trying to find out truths is, in large part, that scientists are willing to test their ideas because they don’t regard them as infallible… You have to put questions to nature and be willing to change your ideas if they don’t work”. -Matthew Syed

Well, if it isn’t your mother, it's Mother Market and she has a habit of teaching you a lesson or two. You need to embrace the ‘Logic of Failure’. Markets are constantly giving you the trader plenty of feedback through your trading statements, a feedback loop that doesn’t lie. There are two types of feedback looks ‘closed ‘and ‘Open’. Pilots (good traders) use an ‘open’ loop where failures are embraced, analysed and learned from. Doctors (aka weaker traders) use a ‘closed’ loop.

A closed-loop is where failure is not recognised and errors are repeated. Weaknesses are misinterpreted and or worse still ignored. In trading, this can be easily done. A poor trade is forgotten after a long day, the winners live strong in memory no active system in place to record what is working and not.

Cognitive Dissonance is prevalent in many new traders’ behaviour and whole topic and blog on its own. It’s a mechanism we use to hide and cover-up failures, so no learning takes place, truth hurts goes the cliché! Generally, when confronted with evidence that challenges our strongly held beliefs our minds tend to play tricks on us and make rational explanations out of thin air for our stupidity. Doctors also don’t like to fess up…. makes them vulnerable to their peers and ego. Does this sound familiar?

Progress, in large part, comes from our willingness to learn from failure. A trader who talks a good game and whose ego is bound with their predictions are most likely to reframe their mistakes and fail to learn from them.

Pilots on the other hand have an open loop where at a collective level there is an ethos of learning where the best lessons are from our mistakes. The more we analyse and track the ‘error signal’ (i.e. timing, sizing, entry exits etc and the frequency) the better we can understand their cause and effect. Then use that learning to whittle them out over time. One other feature is that they practice practice practice! Learn on the ground, not in the air. They test their ideas in a continuous reiterative structure, identifying and improving. Never accept the status quo. Pro traders will still use a demo to test out new strategies or run over ideas over multiple scenarios.

By avoiding failure in the short term there is an inevitable outcome: we lose bigger in the long term!!!! Just learn and bounce back.

Focus on smaller elements that you understand

Ok, that’s the title of another book I have read by James Clear (another great read) but Mr Sayed talks about the practice of breaking a problem into millions of parts and making each one of these parts better by the smallest fraction and putting it all back together. Trading successfully is a huge problem and extremely complex forever changing. Focus on one aspect of your trading, for example trading the ‘Market on Close’ or a specific setup that you believe is favourable. FOCUS break it down analyse it in every way, use a spreadsheet if you have to. Keep a journal and create an ‘Optimisation Loop’ (journal) that you can use to repeatedly improve on the status quo.

CREATE A GROWTH CULTURE

Regard failure as a learning process, trust in the power of process over improvisation. Difficult times come to everyone and it is how we chose to learn and adapt in a typical Darwinian fashion that dictates if we will survive and thrive or dwindle and die. When you have a deep learning process and embrace failure of all kinds as a learning opportunity your motivation and self-belief are not threatened by it.

When we are fearful of being wrong, when the desire to protect the status quo is particularly strong, mistakes can persist in plain sight almost indefinitely. Admit to a minor flaw to avoid admitting to a much more threatening one. Embrace your failure and use that as a powerful growth tool.

How does that all relate to Medics Pilots and Traders? Up until recently, they were bleeding patience to death because they thought it was good for them. Medicine has a habit of being slow to adapt or adopt new best practices. The airline industry meanwhile learns from every detail, every error is scrutinised, a landing a change in fuel load, landing approach procedure etc and most importantly it shares this information. Sharing allows faster growth and learning.

“Learn from the mistakes of others. You can’t live long enough to make them all yourself.” ― Matthew Syed

ONE LAST THING

“The reason is not difficult to see: if we drop out when we hit problems, progress is scuppered, no matter how talented we are. If we interpret difficulties as indictments of who we are, rather than as pathways to progress, we will run a mile from failure. Grit, then, is strongly related to the Growth Mindset; it is about the way we conceptualise success and failure.” ― Matthew Syed

Mental toughness and heart are essential in this game. Think of yourself like a boxer you get knocked down but you get up again, just remember to make those knockdowns count. Mohamed Ali was not better at boxing or stronger than George Foreman in the Rumble in the Jungle, in fact, quite the opposite. He just had more heart!

TRADE WELL AND PROSPER

YP