True Trading Knowledge is Experiential

· 11 min read
True Trading Knowledge is Experiential

The Illusion of Knowledge

"An ounce of action is worth a ton of theory" - Ralph Waldo Emerson

Unlike most endeavors we take on, trading is a little different. In fact, trading to me is one of the most free places of expression on planet earth. In no other industry can you read a few books, open up an account online, and click a button that could be the difference between wealth beyond your wildest dreams - and total devastation. Usually the latter for most participants.

Let me draw a few parallels:

Let's say you read a few of the best books on surgery ever written. You proceed to the theater, gown up and give the patient the assurance that you've read about this all before, how hard could it be? Perhaps you read up on some popular psychology, it's time to drop what you are doing and open up a practice.The fact of the matter is, reading and consuming copious amounts of information from hundreds of sources is not only time consuming, it could be the very thing damaging your trading results. Drifting from one strategy to another and being a 'victim' of the misinformation machine.Yet somehow, every single minute, of every waking moment, hundreds of thousands of people are pouring billions of dollars into a range of random assets with the guise of a 'strategy' that they have picked up from a few books. The more books they read, the more they can justify jumping from system to system and build up a portfolio of excuses instead of one of profits. Worse yet - each and every single one of these market players think they are right.

Personal Accountability

“People around you, constantly under the pull of their emotions, change their ideas by the day or by the hour, depending on their mood. You must never assume that what people say or do in a particular moment is a statement of their permanent desires.”  ― Robert Greene , Mastery

People are left perplexed as to 'why they are so unlucky' or 'it's the government's fault' and begin the inevitable cycle of the novice investor.  Someone who has read 1000 books and applied them all abysmally, there is little accountability for the results of the trading system or style. Adopting a victims mentality where life seems to just 'happen to them'. Few people take ownership of what they put into their mind and are surprised when the results are poor.

Deciding what to read, is the first step of many in developing trading discipline (and any other for that matter). Your conscious and subconscious decision making starts here, it would be an awful shame to throw away an opportunity to develop your own reality.Filling your mind with wholesome, practical, understandable and applicable knowledge is a decision. It's not an easy decision as we live in a world where your data is the product and so everyone wants your time and attention. To master any skill, you need to reclaim your mental real estate. This is the ultimate red pill and something that needs to happen to move towards independent thought.

The Curse of Incorrect Knowledge

If the above scares you, then brace for something far worse. I am sure you are familiar with the phrase 'Garbage in, garbage out'. Namely, any system of belief or construct of your own thoughts can create disaster if they are built upon a house of cards.

There is no shortage of opinions and information in the internet age, this however creates immense opportunity for self-damage . Here is a summary of why:

  1. Tons of stock market systems and information is flawed or only partially correct, it's typically people selling you systems or ideas that may not necessarily work. The goal is to sell, not to teach.
  2. Information that may have been valid in the past, could be invalid in the current market.
  3. Some systems and ideas completely contradict each other. When the time comes to make a trading decision, internal conflict runs amok.
  4. Many systems teach technical principles however fail to emphasize the need to align trading systems with your values and or beliefs.
  5. Books written on trading can show incredible hindsight bias. It's easy to pick some big winners and publish them, it's not easy to explain the emotional management and feelings associated with the discipline.
  6. Trading is a personal experience. Just as everyone has a fingerprint, we all have unique features that will determine our trading style. Books and learning without practice do not take this into account.
  7. Purposeful misinformation creates people who love to trade frequently instead of well. I wonder who would benefit from that? Think about this for a while. I'd also like to take a moment to thank you for liquidity in the markets.

It is no mystery that good information is hard to come by, furthermore, having good information provides no guarantee if you can't apply it consistently.

Weapons of Mass Distraction

If knowing who we are and how we relate to the world of finance wasn't enough, let's add more fuel to the misinformation fire. This was a massive hurdle to my trading and resulted in so many FOMO trades that I lost count.

We are bombarded by media who are like a clingy ex-girlfriend doing almost anything to get your attention. Is this because they want to help us win free money on the global markets? I hope you know the answer is a resounding no!

Here is my brief synopsis of the media and it's impact on people's psychology.

What the Media Wants

  1. Pushing obvious agendas for specific groups of people.
  2. Want your attention for votes.
  3. Want your attention for money or advertising.
  4. Would like you to depend on them for a view of the world as you are easier to manipulate.
  5. Create fear and uncertainty.
  6. Make you feel inadequate and that you need 'more' of practically everything.
  7. Create a sensory overload that takes you away from your current circumstance and reality.

I could keep going but am sure you get the point. What is more important here is the impact of this on our psychology. As most people bombard themselves with these inputs it can be a struggle to switch it off. It creates a drug-like dependency that is hard to shake. The knock on impacts our trading, investing and lifestyle decisions a number of ways:

Impact on Behavior

  1. Indecision, trading news and seeing that things go the opposite way.
  2. Disorientation in your trading plans and goals as you focus on shorter time frames. Most notably because of the fear response.
  3. Not feeling 'good enough' comparing ourselves to the plastic Instagram lifestyle. Note: Those absolute idiots with piles of prop money and rented lambos should be locked up for the harm they do to young and impressionable people.
  4. Thinking short term and being focused on what is supposedly happening around the world.
  5. Feeling like you have to know everything, be everywhere and be constantly connected.
  6. Buying tons of sh*t you don't need and never wanted in the first place.

Overall, bringing this back to our theme of 'knowledge'. The news, social media and the people vying for control of your mind and wallet will not make you wealthy. This is not knowledge, this is the antithesis of knowledge.

Dramatic headlines and attention grabbers fill up social media pages and the misinformation machine keeps pumping whatever rhetoric sells clicks.

Developing True Knowledge

"The more aware of your intentions and your experiences you become, the more you will be able to connect the two, and the more you will be able to create the experiences of your life consciously. This is the development of mastery. It is the creation of authentic power." - Gary Zukav

If reading every book on the planet and being a walking version of Google isn't knowledge, then what is?

In my experience the ultimate way to gain true lasting knowledge - is to experience things in real time, feel what it is like to trade a system and document it closely. It is to take a hypothesis from a few sources that are reputable,  avoid Guru dependency and to adopt the processes and methodologies as your own until you can at the very least 'survive' as a trader.

Although this may involve using multiple resources, some resources are far better than others. Below is a very broad framework of what some would consider logic in choosing something to follow.

A quick summary of what to avoid:

  1. A trading system that or 'Guru' offers 'riches beyond your wildest dreams' or instills a feeling of quick money and luck.
  2. Traders or trading systems that are a black box, ie. They don't tell you how the system works but 'trust me it works', simply give me X dollars and leave it up to me.
  3. Pretty much anything to do with Forex until you are experienced - I am sure someone will argue this point, I've found it to be a murky business.
  4. Those who seek to create dependency. Ie. 'Join my service and I will tell you what to trade'
  5. A system that you struggle to understand, this is of course pending you have given it the correct amount of time.

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What to look for:

  1. Traders who will tell you the truth, some great follows on Twitter (unless you are smart enough to abstain totally: Lone Stock Trader, Jim O'Shaughnessy , Niclas Hummel and Mark Minervini) - these guys tell it for what it is, and appreciate the psychological aspects of trading/investing.
  2. Books and systems that you understand. If you have read a book on trading and believe you could apply it, understand the probabilities and functions of the system in real time - make sure to keep it on your list of books to read again (and again).
  3. Information outside of trading that you can use to develop the skills required to follow systems. Again, find a few resources you can trust and that resonate with who you are. I'll give some recommendations at the end.

Creating Experience

Once a shortlist of systems, approaches and resources are created the fun really starts. Experiencing the system and process in real time with money on the line will be a true test of the information you have taken on board. It is at this point that you begin applying the lessons learned and most importantly measure exactly the results are and how closely you have followed the system.

It is imperative to keep a journal of our trades and measure the results on a number of merits:

  1. What % of trades you are taking are part of the system.
  2. How do you feel when taking these trades?
  3. Do you believe in the system and can follow it closely?
  4. When you did not follow the system what was the main reason?
  5. Does the system align with your fundamental beliefs about the market and trading success?

There are of course a number of other qualifiers. It's up to you to ask these questions and appraise the information you take in, true learning however will take time and many hours of personal reflection and perhaps even struggle. This is deeper than a standard 'R-multiple' trading journal and something that encompasses psychology and discipline into understanding your chosen system.

It's a Process

The difference between superficial and experiential knowledge has one key component. Time.

Once you have synthesized and funneled out the information and put it into useful categories you would like to try in real time, its important to gauge the results over time. Novice traders tend to jump from system to system and seldom give the selected strategy the appropriate sample number required to play out.

I found in my trading experience that switching from one strategy to another did nothing but confuse and disorientate me. I was learning what not to do as a trader which in hindsight was invaluable but would have far preferred to skip this step.

Like any skill, trading takes practice and developing an 'eye for the ball'. Once you have developed a decent enough swing to win a few games, you can get more creative. As long as the creativity you add is based on a series of sound fundamental rules that can be consistency followed.

Slow Down

It is paradoxical that taking a break from binging  on information leads to learning.  During the intense 'hungry' for knowledge phase we consume so much content that it is hard to know what is good, bad or redundant. We spend more time learning more as opposed to qualifying what we have already learned.

It is important to slow down the learning process and evaluate it's impact on your psyche.

This is of course easier said than done. We are taught to learn like parrots in the current school system and regurgitate information with very little wiggle room for creative expression. It comes as no surprise that we see the goal of learning to simply reproduce what we have seen. The more we cram in, the better the result - or so the dogma goes.

Slowing down and using our type 2 thinking (more rational and longer term), allows us to act in a far more methodical and logical manner. I think every trader should aim to operate in longer time frames. I don't mean the time frames on the chart itself, I am referring to their long term trading goals based on a sound trading system.

So often we can get caught up in the Holy Grail Syndrome, trying to read and know everything. We are left burned out, confused and have an amygdala that is growing under stress and impacting not only our short term trading but our long term health (referenced from 'Behave'). Very seldom does this neurotic approach to business, health and investing result in a positive experience.

My Own Lessons from Experience

  1. There is no crystal ball, making assumptions costs money and breaking the rules is usually because of assumptions.
  2. Being wrong is not only part of the game but how we win. Managing our emotional states around loss is one of the key winning ingredients in trading.
  3. Following a system you don't understand is like following a diet with food you hate.
  4. Changing behaviour is complex, challenging, time consuming and rewarding.
  5. Things are not what they appear to be. It is good to question not only what you see and hear but your own beliefs and assumptions.
  6. Money is a game. If you take it too seriously you will always lose due to your association with fear and loss.
  7. Your most powerful trading asset, is you. The decisions you make and your ability to follow proven rules.
  8. If you chase money, you will lose other things in life that are more important. Follow a process not a goal. The joy is in the process and not in the final result (what does a dog do when it catches the car it was chasing?).
  9. Be kind to yourself and develop an attitude of continuous learning. Trading takes time, anything of value takes time and has a personal cost. Know that cost now and coach yourself with a positive inner voice.

There are a few more that are slightly deeper and more philosophical but for the most part the above covers items I struggled with for some time. I would of course welcome some feedback on your own experiences and things you have overcome during your trading career.

Useful Resources

Some of my core beliefs and attitudes are being shaped from the texts below. These are top quality in my opinion. I have decided to put my Audible account on pause and re-read these books. Each time I learn something new. In no particular order.

  1. Mastery - on taking time with learning, some great lessons from masters throughout history. Fantastic book about giving things time.
  2. Deep Work - about cutting out the noise and focusing on what is truly important and impactful.
  3. Principles: Life and Work - broad but useful on how best to obtain, act on and implement information.
  4. Trading in the Zone - a classic on following your system and rules
  5. AlphaBrain- About decision making, rule following and our own mental obstacles (recent and final addition).
  6. Behave- on human behaviour and why we do what we do. Great for perspective, decision making and questioning why we make decisions like we do.

Ironically, I have recommended these books and also told everyone to slow down on the reading. I hope however that the above texts can save you time in sifting through the tsunami of information available online. These resources have been a tremendous help to me and my trading performance.

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