Better Trading Through Feedback
The other day a Wired magazine article caught my eye. It discussed a common problem facing many American municipalities. “In 2003, officials in Garden Grove, California, a community of 170,000 people wedged amid the suburban sprawl of Orange County, set out to confront a problem that afflicts most every town in America: drivers speeding through school zones.” Instead of putting more cops on the beat or increasing speeding fines, the officials of Garden Grove used a much simpler approach.
As Wired magazine wrote, “In five Garden Grove school zones, they put up what are known as dynamic speed displays, or driver feedback signs: a speed limit posting coupled with a radar sensor attached to a huge digital readout announcing “Your Speed.”
The signs were curious in a few ways. For one thing, they didn’t tell drivers anything they didn’t already know—there is, after all, a speedometer in every car. If a motorist wanted to know their speed, a glance at the dashboard would do it. For another thing, the signs used radar, which decades earlier had appeared on American roads as a talisman technology, reserved for police officers only. Now Garden Grove had scattered radar sensors along the side of the road like traffic cones. And the Your Speed signs came with no punitive follow-up—no police officer standing by ready to write a ticket. This defied decades of law-enforcement dogma, which held that most people obey speed limits only if they face some clear negative consequence for exceeding them.”
Here is the most amazing part of the story. In the vicinity of the schools where the dynamic displays were installed, drivers slowed by an average of 14 percent. Not only that, at three schools the average speed dipped below the posted speed limit.
The reason that the Garden Grove experiment worked was because it relied on the power of feedback loops. As human beings we despise being told what to do (think about a nagging spouse or your scolding mother) but will react properly to information that is presented to us neutrally in real time..
Imagine the power of a feedback loop in FX trading. Here are just a couple of examples that I think could help traders make much better choices. Every time an order is placed, a pop up window would open and say “You are selling 100000 EURUSD. Your risk on the trade is 500 dollars” Or if you didn’t attach a stop order to the trade, the pop up window would say “You risk on the trade is 7000 dollars out of 10000 equity.” How many of us would place an order without a stop when faced with that reality?
Note that in the examples given the pop up message does not ask you an annoying “Do you want to proceed with the trade?” and force you to click a Yes button. Instead it simply presents the information as is and allows to react to the data. My hunch is that such a system would be much more effective in curbing bad trading behavior than all the self-discipline books ever published.
As human beings we are naturally impulsive and we get caught in the emotion of the moment regardless of how much discipline we try to apply. That’s why having an instant feedback loop would be so helpful. It would act as just the right kind of reminder of the consequences of our actions. My favorite pop up window that I would like to see on my trading platform? “The trade you are about to execute does not comply with the rules of your strategy.”