Wednesday, August 08, 2007

Chess, Tai Chi, and Trading: Inner Views of Learning and Performance

My recent post on "Becoming Your Own Trading Coach" referenced Josh Waitzkin's excellent book The Art of Learning. In his book, Waitzkin describes principles of learning and performance that helped him excel in two disciplines: chess and Tai Chi Chuan. These principles are highly relevant to the cultivation of expertise in trading, though they're rarely acknowledged.

To illustrate three of these principles and their application to trading, let's take a simple day trade from Tuesday's market in the ER2 (Russell 2000) futures. We can see that the Russells moved to a new high on expanded volume around 11:30 AM. It was at that point that a nice short-term trade set up--but only for those who had achieved a degree of inner mastery.

Let's break it down, principle by principle:

1) Investment in Loss: Waitzkin describes putting "your ego on hold" and growing through challenges that leave you beaten up. He also captures the essence of Push Hands Tai Chi, in which elite performers "dissolve away from attacks", absorbing and dispelling their energy rather than resisting it. When the market jumps on high volume and makes a new high, our emotions are engaged: we become fearful of missing a good move; we become overeager to jump aboard the move; we become mired in regret for having missed the move. But the expert trader absorbs the event and widens his perception. The market may have thrown him for a loop, but his is the stance of the observer, not the frustrated or defeated participant. He looks for the information in the event: that's the investment. Standing apart from his own market, he can see that the other stock index futures--the ES and NQ--have not made new highs on this move. What looks like a breakout--and the start of a new trend--looks, from a wider perspective, more like a fakeout. Physiological arousal speeds us up; it narrows our perception. The expert performer, looking for the investment, widens his view. Like a good quarterback under the pressure of a blitz, he focuses, sees the whole field, and completes the play.

2) Slowing Down Time - Time moves extra quickly when we're in the physiological arousal of flight or fight. The market seems to be racing when it's moving to new highs without us on board (or against our position). But the expert performer knows how to slow down time. Waitzkin describes observing minute tells in his adversaries--shifts in their eyeblinks or breathing--that enable him to time his movements. Such fine observation is only possible when the mind operates in slow motion--and when we've trained the mind to slow itself under duress. When the experienced trader sees buyers chase the new highs, he becomes very slow and focused for the next minute or two. He watches each trade coming into the market: are large traders jumping aboard the move or standing aside? Are they entering as buyers (lifting offers), or as sellers (hitting bids)? The slowed-down trader can *feel* that the market has stalled after its upward thrust. It's just like a martial arts opponent who has lunged at you, and now is off-balance. That's the cue to enter the market in the opposite direction, knowing that all those buyers who chased the highs will have to unload their positions at lower prices.

3) Numbers to Leave Numbers - Waitzkin explains that the beginning chess player learns by explicitly studying the value of each of the pieces and using this information to help guide play. Eventually, with repeated experience and the internalization of study, the developing chess master no longer thinks in terms of numbers. The value of the pieces in relation to one another is something that is felt, not calculated. But you can only leave numbers by first immersing yourself in numbers. The beginning trader diligently calculates all the relevant information: volume, price movements in various markets, etc. But the expert trader *feels* that the market is stalling and losing steam. His knowing is visceral, like the Push Hands player who senses an opponent that has lost his center of gravity. At that point, you are the market; it is within you. But you never get to that point of implicit knowing without those arduous investments in loss: what Waitzkin calls "using adversity" to further development.

A move in the market. The movement of our emotions. Consciousness widens or narrows. Time slows down or speeds up. We either lose our investment or invest in our losses. These are the invisible, but vital, facets of performance for the short-term trader. I think you'll find that Waitzkin's book is a fine introduction to learning and expertise, a rich road map of the performer's inner world.

RELEVANT RESOURCES:

Trading and Information Processing
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4 comments:

Keith Shepard said...

Excellent post, Dr. I'll look for that book over at Amazon. It sound great.

junior said...

Great, concise points. Thank you. In your example, you used the "fake out" up-tick as an example of testing one's restraints. Can you comment on how the principles apply to the "panic selling" which often create "over-sold" positions and volatile market session?

Brett Steenbarger, Ph.D. said...

Hi Junior,

One thing I like about the Waitzkin book is how it links performance to the cultivation of self control. We can see how those who have blindly followed panic buying or selling have been badly hurt in this market. Look at the "tails" on 60 min bar chart of ES, for example.

Brett

Dave said...

Number 2 struck a chord with me, Brett. My wife was a world class distance runner and claimed she could do the opposite - that is, "collapse" time during races. I sent her the link to this post to get her thoughts and here's what she replied:

"I collapse time in races. Rather than slowing time down, I speed it up. WIth concentration, I can make a 3:00 interval last only a few seconds in my mind. I was trying to make the start and the finish the same point in time. Imagine a long line with a starting point and a finishing point. Maybe there is 10,000m in between. I tried (and was successful on a very few occasions) to take the starting point and the ending point - like ends of a rope - and bring them together by bending the rope, bending time, to the same point in space. The book, A Wrinkle in Time, calls this a tesseract. Perhaps your trading gurus have mentioned tesseracts?"

Interesting and maybe a bit out there for mere mortals like myself. ;-)