Simplest Trading Change Ever

• Posted by Derek
• on December 31st, 2011

I did something radical this week. My week was planned for study vs. trading anyway, so why not use the time for a crazy experiment? I banished price change from my field of vision. Trust me, I am a firm believer that only price pays; every piece of my work is based on the interplay of price and sentiment. But there is a difference between price analysis and price fixation, and somehow the way my eye trained itself to watch quotes this “Change on Day” became the default for my eyes. I don’t want to look there, I just do.

Focusing on “Change on Day” is like focusing on the score of any one quarter of a football game(innings in baseball, periods in basketball/hockey/soccer, pick your poison); ridiculous even for a bettor. Yet the default scoring method from quote providers and the media is the distance traveled since 4pm yesterday. I care about price change since a major pivot, over the last 5-10 days, over a rolling quarter. Since yesterday? Not so much. Just like a sporting event, yes, a significant quarter or inning could make the difference in the game but there are better measures that indicate shifts without noting an endless stream of false indications. The default way in which I first receive price data, to me, amplifies the potential for distraction.

This hidden form of Myopic Loss Aversion in no way keeps me from accepting losses immediately; my list of losers is extensive and each new one gets tossed into that illustrious pile. No, the impact on me is a tendency to back off with timid entries or quick, minor profits once Change on Day seems “too high”. What the hell does that mean? I quantify everything I do; why can’t I quantify away my belief that the closing price at 4pm yesterday is rarely a critical factor in the decision-making process? I care only about the direction, speed, and level at which I’d like to enter & exit…for someone looking to hold one for the next 20-40 closes, I’ve allowed yesterday’s close to take up a disproportionate amount of brainpower.

The before and after example above requires no new work; just a decluttered quote line in the top left corner. It felt ultra-weird after a decade+ the old way, but after a few hours I felt incredibly synched to the signals instead of the noise. Price is there, it’s just not where it was when I developed early bad habits, and my eyes are now drawn first to the multi-day context instead of that single data point.

An incredible experience, not saying anyone else has a “kryptonite” factor but if so then removal of noise can only help. Maybe you’re too tuned into doom and gloom; well, stop following ZeroHedge and just assume that if something meaningful is said it will end up in your stream via your well-vetted “editors”. Afraid to miss a key stock being up in a down tape? Pretty sure it will somehow flow to your attention whether it’s up 0.2% or 2.0%. For my energy, change on day was long on subjectivity and emotion and short on evidence, and I’m happy to not see it every time I pull up a chart.

Bottom line, some rules are made to be broken. For most of us, constant updates about the exact amount price has changed today is about as useful as a scoreboard telling a golfer the current wind speed. He’s there, he knows it’s windy; a flashing light every time it changes from 15 mph to 17 and back is an unnecessary visual input. For me this was a perfect way to combine the minimalist and conqueror mindsets that are the shared ethos of my amazing Twitter stream. I’d love to know what I could be missing from this picture; I doubt I’ll change this again in the roaring “teens” so feel free to enlighten me before 2012 gets underway!

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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