Enhancing Trader Performance by Brett N. Steenbarger

Author:Brett N. Steenbarger [Steenbarger, Brett N.]
Language: eng
Format: epub, mobi
Publisher: Wiley
Published: 2012-05-20T14:00:00+00:00

Zeitz presents a large body of findings that reveal how the ways that experts process information aid their reasoning, yielding superior performance. She refers to MACRs—moderately abstract conceptual representations—as a cornerstone of expertise We can think of MACRs as a kind of road map—like the physicians’ decision trees—that organize the perceptions of experts. The chess expert encodes the positions of pieces in terms of strategies; the physician organizes symptoms into clusters based upon a system of diagnosis. As I am writing this, stock markets in Europe and Asia are down sharply in the wake of poor earnings news after the New York close and a panicky response by Japanese investors regarding alleged wrongdoings at a popular Internet firm. Bonds around the world are firm, oil is higher, and the S&P 500 futures are down sharply. An experienced trader possesses a MACR that links all of these markets, viewing different instruments across countries as part of a single pattern: Assets are being shifted from speculative sectors to relative safe havens. Novice traders, lacking internal road maps, focus only on their markets, misinterpreting strength or weakness.

Notice that these mental maps allow experts to be more flexible than nonexperts in their reasoning processes. For instance, a map that distinguishes financial panic days from normal days leads a trader to look for intermarket relationships that would not exist otherwise. Lacking this flexibility, the novice trader on a day like the current one cannot place the effective trades in which movements in one safe-haven market (German Bund) lead moves in a different, speculative one (U.S. stocks). A novice trader, fixed in a view that falling interest rates are good for stocks, cannot sell stocks when very weak economic news leads bonds to rally and stocks to tumble. Where the novice thinks concretely, the expert reasons contextually. Instead of thinking A always leads to B, the expert creates a web of possibilities in which A leads to B under conditions X and Y, but leads to C under other conditions.

Paul Feltovich and colleagues emphasize that an important way of developing flexibility is to practice skills with as many variations as possible. This allows performers to develop rich mental maps that can guide performance under almost any conditions. Recall McNab’s observation that only 15 percent of troops in World War II combat actually fired their weapons. Because they had not encountered similar battle situations during practice, they lacked the mental maps needed to guide them under such dangerous conditions. This has significant implications for traders. Not infrequently, traders make money under one set of market conditions only to give it back when the market changes. As we shall see shortly, rehearsing trading with historical data enables traders to encounter multiple trading scenarios and conditions. This is a highly effective strategy for building the maps and flexibility needed to make rapid, accurate decisions under conditions of high risk and reward.

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