Touch Trading

Old time chartists used to lament the onset of computer generated graphs noting that there was just no substitute for manually marking every price movement on a piece of paper. Although modern day traders dismissed those observations as grumbles from the dinosaur age, now comes a New York Times article that substantiates much of the old timers claims. In piece titled Brain Calisthenics for Abstract Ideas written by Benedict Carey, the Times states, “For years school curriculums have emphasized top-down instruction, especially for topics like math and science. Learn the rules first — the theorems, the order of operations, Newton’s laws — then make a run at the problem list at the end of the chapter. Yet recent research has found that true experts have something at least as valuable as a mastery of the rules: gut instinct, an instantaneous grasp of the type of problem they’re up against. Like the ballplayer who can “read” pitches early, or the chess master who “sees” the best move, they’ve developed a great eye.

Now, a small group of cognitive scientists is arguing that schools and students could take far more advantage of this same bottom-up ability, called perceptual learning. The brain is a pattern-recognition machine, after all, and when focused properly, it can quickly deepen a person’s grasp of a principle, new studies suggest. Better yet, perceptual knowledge builds automatically: There’s no reason someone with a good eye for fashion or wordplay cannot develop an intuition for classifying rocks or mammals or algebraic equations, given a little interest or motivation.”

I find this latest discovery in cognitive science fascinating because it confirms much of my own experience in trading and developing strategies. My process for idea generation is extremely messy. I will often experiment with a many different variations on the theme, sometime even trading without any rhyme or reason in order to uncover some underlying pattern of the market that may be exploited for an edge. Unlike purely quantitative traders I never construct an algorithm first and then try to apply it to the market. I always try to be empirical in my approach and while I appreciate the power and the efficiency of back testing software I believe it is a huge mistake to rely on its computer generated results for your trading strategy.

Too many traders love to cobble together a few indicator driven strategies dump them into Meta trader quickly obtain the results for the back test and then put it to work without any additional thought. Little wonder then than most traders are shocked that real time trading results are diametrically opposite of the equity curve of the back test.

Instead of just plugging data into a back testing software, I believe that there is no substitute for first testing your idea manually on the chart. Although the process may seem tedious, its actually incredibly insightful. As you run through 50 to 100 sample trades you can quickly begin to grasp whether your idea has merit or not. More importantly, you can see exactly where and why it is working or failing. As human beings we are highly tactile animals and the process of physically interacting with the price action sharpens our analytical skills much better than looking at reams of spreadsheet reports.

Don’t get me wrong. I am not arguing that we abandon the software back test altogether, merely that we make it the final rather than the first step in the development of a viable trading strategy. We need to touch our trades before we truly understand them.

Boris Schlossberg

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