Forex Trading Strategies – Forget Your P & L
A fascinating article in this week’s New Yorker entitled the “The Truth Wears Off’ describes a troubling new trend in science. Many of the scientifically tested and accepted hypotheses lose their accuracy over time. Replication -- which is simply the method of replicating well established, statistically valid scientific experiments -- often results in much weaker evidence the more times it is performed.
As the article author Johan Leher notes, “Francis Bacon, the early-modern philosopher and pioneer of the scientific method once declared that experiments were essential, because they allowed us to ‘put nature to the question.’ But it appears that nature often gives us different answers.”
To those of us who are not scientists the whole dynamic sounds awfully like the Heisenberg principle in action -- namely that the mere observation of a thing may in fact change its properties. Now before real scientists eviscerate my layman’s misinterpretation of Heisenberg’s ideas, please give me a chance to explain. (Heisenberg by the way, as I was dismayed to find out in doing research for this article, was a horrid human being who did everything in his power to create the nuclear bomb fro Hitler. Fortunately for us all he was also a terrible applied physicist and botched all of his experiments on the subject)
At its core Heisenberg’s principle simply states that one cannot know with absolute certainty both position and movement of the particle. One can only know one but not the other. And although the bastardized version of his idea as it applies to social sciences is certainly not what he meant, it nevertheless, I believe, carries some interesting insight for us especially as traders.
The idea that observation can have a material skew on our behavior is I think quite valid especially on the individual level. From the earliest age onward we are all keenly aware of the change in our behavior when someone watches our actions. Unless you are a pure exhibitionist like me, very few people can thrive under public scrutiny. Most of us generally do well when we focus on the task at hand rather than squirm under someone’s merciless gaze.
Ironically enough I think that ideas applies most strongly to ourselves as traders. How many times have we all been affected by our endless observation of the P & L statement? How many times have all of us laid down trades, taken trades off, held off on trades, plunged into trades -- not for any intrinsic reason having to do with the trade itself -- but rather because we were reacting to the up and down movement of our P & L?
Nobody is more guilty of this sin than I, who constantly cuts his profits short just because I have reached some arbitrary target on my P & L or lets his losses float too long hoping to move the P & L back to even. That’s why next week I will close out the P & L window on my account and focus only the trade setup, ignoring all profits and losses for a week. I am highly dubious that I will have the discipline to resist a look, but let’s see if in trading ignorance is truly bliss. I’ll report the outcome next week.