Tuesday, March 1, 2011

Observe the Market: Am I seeing what I want to see or what IS?

Observing the market is the next skill addressed by the P2P process. But you're probably wondering what's the big deal, every trader is observing some aspect of the market throughout the day. At first impression, observation seems like a simple skill; a trader looks at something, soaks in the information, does some quick analysis and makes a decision. Simple in concept, but the challenge rests in deciding what to look at, when to look at it, and how to make sense of what you see. Additionally, sustaining attention and discriminating good signals from distracting noise requires the right level of arousal, psychological flexibility, and depth of understanding of market nuances. 

Observational skills to a trader is like water to a fish; their intimately connected for survival. How a trader observes information a market presents varies to the extent to how they contextualize that information. Context, is like a frame to a picture, it contains the art piece, but equally can add depth and uniqueness to the observing eye who's making sense of what they see. Traders also need to be proficient at managing cognitive biases that distort "what is" into what they "want things to be." Left unmanaged, these distortions are at the foundation of many a traders ruin. 

"Do you see what we see?"

The P2P process not only helps a trader observe and organize the external market more proficiently, but equally targets the traders internal market where the unfolding story of making sense of things takes place. The integration of external market management (EMM) with internal market management (IMM) is the foundation of developing competence in observing "what is." The use of technology can assist in helping traders express what they see into an organized framework and executable strategy. For example, having a digital journal allows the trader to capture real time observations about market behavior and their thoughts and feelings regarding those observations. Retrieval of this unique data either graphically or via video review, is a key component to refining market knowledge skills and improving the acuity of trade setups.

One trader we worked with suffered from being overloaded with too much information during the trading day. He had two squawks that were inputted into his headphones, one computerized and the other was from the pit trading floor. Instead of trading based on what he saw or observed on the charts and depth of market, he was impacted automatically by sounds from the squawks. Once the squawk was eliminated, the trader went on a tremendous string of winning days. The best traders are able to limit the impact from outside sources, allowing them to access the flow of the market and truly see what is happening.

So as you likely "see," seeing what the market actually is doing is not as easy as it appears. By eliminating distractions, the internal & external noise and managing cognitive bias, the best traders maintain a poised and ready state to respond to what is and not what they wish the markets to be. This allows them to sit on their hands when nothing noteworthy is taking place but also to strike with quick execution when they observe their trade setups developing.

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