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A Work on System Design-II: Psychological Profile

May 10, 2010

This is second part of a seven post series, following twice in each week, I will be talking about the art and science of trading system designs.The blog posts will encompass,the logic,the philosophy behind the logic,the code, developments, design and other technicalities of trading systems.Previous parts here: Part -1

In the last part, I posed a set of 15 questions, which have no right or wrong answers. Its just an effort to understand ourselves better, our limits and capabilities. Reader will be well disposed to understand, that as humans we have immense capabilities to surpass the worst of our handicaps. So what is posed as a limit, can very well get shattered by the pure force of will and determination tomorrow. I dont subscribe to the fact,that in trading we get uncomfortable when we try to do something which we are not meant to do, or hardwired not to do, and essentially will fail. I believe, on the edge of known boundary lies that of unknown, and this is where our laws of understanding fail, falter and go up in flames, and most probably this is the realm where miracles take place.

What will follow next, is the basic logic of asking these questions:

1. How old am I?

This question is posed so that it tries to understand, three factors, a. your risk appetite, b. your “possible” reflex c. your emotional baggage.

This is not to put forward that with age, risk appetite goes down. I have seen a few people who have notched up their risk appetites quite heavily during their sunset years, because they dont have much responsibilities in their hand. Also,its generally observed that with age, reflex speed often goes down, and with that the ability to take lightning fast action. Often, as much as slow nerves, our emotional scars also play quite a potent role.

2. Have I traded/invested before?

Your previous investment/trading experience will talk a lot about, if you know, the rules of the game, and how things work. Not that its terribly useful, but it doesnt hurt. But possibly, just possibly I am also trying to gauge if you have traded and acquired battlescars.

Everybody acquires battle-scars. Period. But performers, see them as a reflection of how far they have come, and using it to reinforce their positive self image, while others use it to reinforce their negative self image.

And often, a thinking questioning mind holds the key.Have you ever noticed the first group, almost always are in constant zone of self improvement,constantly improving on their pitfalls while the second group, blames the system.

3. Why do I want to trade?

A very,very important question. Why? Do you want to trade because its cool? Do you want to trade because of money?Do you want to trade because you are in financial crunch? Do you want to trade because you dream of financial independence?

No judgements on my part. Nothing is wrong about any of the answers. But its important to know the reasons. And to remember it. Because the very aspect of questioning ourselves is positive.
4. Describe one situation in life, where I have taken risk?

I want to find,what kind of risks do you take? Cold, calculated risk, or self destructive risks. How to discern? Weigh the downside. The downside measure is again subjective, but lets accept that something which doesn’t put you out of the “game”, evolutionary(death), financial(bankruptcy) or career(crime).
5. From where am I going to put my trades?

Important. Office? Home?Cyber Cafe?

What can the problems be associated with each?

Office, if its an broker office or your employer’s office, it depends. Both has its own set of flags. Question it.

In India, people have to even think about how the environment in their office is. Who their employer is : Govt or Private. You get the drift.

6. What is the frequency with which I can go for a smoke/coffee/amble towards my mate for catching up that office joke?

This  is important from a trade execution/monitoring perspective. What is the frequency with which you get a timeout, so that you can put your trades or monitor it. If you are trading from office, you can’t have a system which trades on 2 minutely time frame, throwing 5 signals  in an hour. If you are going to put your execution from home, you have have a system which can throw upto 6 signals in half an hour.

If you get some free time , 6-10 minutes at the end of the day, around say2.30-3.15, you can think of trading a swing system. End of day, which holds position for a maximum 2-3 days.

Get the drift?
7. When I come home, what happens to the clothes I was wearing?Shoes?

This question is supposed to know about how, disciplined you are. Do you take a minimum effort to better your life? Everybody loves wearing pressed shirts, pants and jeans. But do we take a mimimum effort to fold it/ hang it on hangers, howmuchever tired we are?

The bigger question is everybody loves to have money,but are we ready to put some effort to it?

Remember, money won is twice as sweet as money earned, but to win, you have to take pain, which makes it all the more sweeter.

Trading takes discipline, and system trading needs brass balls. Hope you have both!

8. Before I take a decision,do I tend to deliberate and delay or am I finger happy and say “damn-the-torpedoes”? [Both have been phrased in a negative way]
Both are good, both are bad. While the previous, can induce “paralysis by analysis” syndrome, but the second can lead to reckless risk taking. A prudent mix of both is required.

My favourite analogy is that of a tropical hunter. He lays out the bait, prepares for days before, plans out the entire set of possiblities how his prey might react, and then he waits. He waits, he waits, he waits. Often a time ,when man is alone with his thoughts, he doubts, his ideas, plans, intentions.

But then, the prey eventually figures up. He doesnt move. The looks tentatively unsure about itself that it almost walks into the trap, but not yet! Those split moments,is the most crucial, the hunter is tempted to make good of his promise,but not yet, not yet. Bow risen,the string taut, the arrow yearning to set free, to strike open the rope, to make the log swing, trapping the prey in its nets forever. But not yet.

And then, the moment arrives. The hunter can’t afford to be unsure of himself. He has to let go of the arrow to strike its destiny.

9. Am I ready to sacrifice? Sacrifice a lot?

In life, everything positive,every destination higher, better than ourselves require sacrifice. And in trading, the situation is so skewed, that until unless you are better than 2-3 standard deviation from the mean, you dont stand a chance.

For me, I dont see trading as a means to entertainment. Its not a hobby. I am not that rich enough, to take up such a costly hobby. For hobby, you dont make sacrifice, you dont choose to bear pain.
10. What is the money with which I am going to trade?

Source  of funding- make it sure, it is something you can afford to risk. But yes, I hope, afford to risk doesnt mean comfortable to lose.

11. Elaborate on the possibility of a golden solution to life’s problems?

I dont know, what your answers are. No comments, but I know your answers will evolve with time. Today you might believe, for a possibility of a Holy Grail- a silver bullet to life’s woes. But I can assure, your thoughts will grow up.

12. Do I take my decisions of day to day life by myself or do I like to listen to others suggestions?

Tries to gauge, how much self-reliant or contrarian you are. If you are indeed self reliant then contrarian systems are good for you.If you aren’t, its possible you need to trade systems which aim at low risk, low reward situations.
13. How many hours of reading do I put per week?

The higher,the diverse, and older it is, the better.
14. Does one have to be always right to make money?

Important question. Because realizing this is important between good trading  and bad trading.

15. Do I give attention to detail?

The quality of your attention will help you to pick up subtle inefficiencies in the market, and exploit them for future system developments.

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