Forex Trading Strategies – In Trading Self-Knowledge is Worthless

From NY Times 1.17.11

It is practically an article of faith among many therapists that self-understanding is a prerequisite for a happy life. Insight, the thinking goes, will free you from your psychological hang-ups and promote well-being.

Perhaps, but recent experience makes me wonder whether insight is all it’s cracked up to be.

Not long ago, I saw a young man in his early 30s who was sad and anxious after being dumped by his girlfriend for the second time in three years. It was clear that his symptoms were a reaction to the loss of a relationship and that he was not clinically depressed.

“I’ve been over this many times in therapy,” he said. He had trouble tolerating any separation from his girlfriends. Whether they were gone for a weekend or he was traveling for work, the result was always the same: a painful state of dysphoria and anxiety.

He could even trace this feeling back to a separation from his mother, who had been hospitalized for several months for cancer treatment when he was 4. In short, he had gained plenty of insight in therapy into the nature and origin of his anxiety, but he felt no better.

What therapy had given this young man was a coherent narrative of his life; it had demystified his feelings, but had done little to change them.
Was this because his self-knowledge was flawed or incomplete? Or is insight itself, no matter how deep, of limited value?

I wondered about this question myself as stared dully at my screen the other day shaking my head in amazement at the volatile price action this week. Self knowledge -- the mantra of so many trading gurus -- was really worthless, I concluded. What matters in trading is not the ability to understand yourself, but the ability to understand the market.

For example, I’ve known for a long time that I am quick to take small losses but have no patience to milk large profits. Therefore intra-day trading should be my focus since it dovetails nicely with my personality. Sounds good, but -- so what? That and $2.25 will get you on the subway, as they say in New York.

Understanding my own behavior relatively well has nothing to do with how successfully I trade. The key to becoming a productive trader is to develop a model of the market that you can trade with comfort and confidence.

That task is much easier said than done. Markets are brutally efficient and almost any strategy you design quickly loses its edge as imitators replicate it and whittle away any profits. This is especially true for any purely quantitative strategies that do not take context into account. The truth of the matter is that price movement is mostly random. I do not mean that prices jump around for no reason, but rather that those reasons shift and change at a moments notice based on the latest news events, market sentiment, and supply and demand actions from various market actors such as central banks or corporations.

Still, a trading model is our best bet at making sense out of chaos. Unfortunately, unlike business process automation techniques on factory floors that rely on certainties of Newtonian physics (quantum physicists save your breath and allow me to run with this analogy), trading models must deal with vagaries of human behavior and therefore by definition will never be able to stamp out profits with Teutonic precision. Indeed one the keys to building a robust trading model is to account for the f-up factor. Next week, I’ll discuss my adventures in building one such model for short term trading. In the meantime l will try to do less navel gazing and more market observation in order to improve my P&L.

Boris Schlossberg

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