While much of the focus on trading is around chart patterns, scanners, analytical techniques, indicators, quantitative techniques etc., most of it is commodity. Everyone has access to same tools, techniques, books, research or analysis. So why is it that some traders are very successful and some are not. You can largely divide the traders in to those with consistently good returns, those with mediocre returns and those who are unsuccessful. Most of the time you will find mediocre traders continue to have mediocre returns for long time and their best years never exceed beyond a certain thresh hold.
Much of the same things you will notice in life in general. Vast majority remains stuck in sea of mediocrity. It has nothing to do with innate talent or efforts. Much of it has to do with mental models.
Mental models are deeply held mental images, beliefs, and assumptions. The mental models play a very important role in dealing with world around us. We interpret the world according to our mental models. Two people with different mental models react and interpret same data and same situations differently. Mental models include what a person thinks is true but not necessarily what is actually true.
Successful people in most walks of life have different mental models than mediocre people. That is why successful people can see and act on opportunities which others do not see.
One thing which you can do to be successful in trading or in life in general is to change your mental models. But in reality it is one of the most difficult things to do. Movies often have very dramatic scenes of mental model change leading to transformation in leading character. But in real life changing mental models requires a sustained and structured process and many times requires facilitation by an outside entity. There is a vast array of books and techniques dealing with this field. I have spent years studying this fascinating field of mental modeling.
Once you have the right mental models you see the markets and the trading opportunities differently.
Mental Model Links
Mental Model Website
Mental Models
Mental Models by P. N. Johnson-Laird
Mental Models, Metaphor, Systems Theory and Theory
A Latticework of Mental Models
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5 comments:
Can you recommend some good books with respect to mental modes in both trading and other aspects?
You will find lot of literature on this on web. Peter Senge popularised it in management literature in his book Fifth Discipline. I am not aware of any trading specific book exploring this concept.
My interest in mental modeling started with my first job in advertising. All successful advertising is based on manipulating consumers mental models. That is how advertising adds value to a product which does not exists in the product itself.A successful change in consumer behavior involves changing his or her mental models.
Subsequently while studying leadership again I found good leaders have different mental models compared to followers or other ineffective leaders.Leadership essentially involves changing or influencing followers mental models.
I believe, and I think Pradeep believes the same thing, that an amateur without schooling but with a scientific attitude can make tons more money in the markets than most financial professionals or academics! The heuristics (mental models) that we build are built from scratch, relatively unpolluted by a "higher (mis)education.
http://en.wikipedia.org/wiki/Heuristic
http://en.wikipedia.org/wiki/Behavioral_economics
http://www.behaviouralfinance.net/
The irony is, most of the research has been done already – dozens of effective methods have been documented – but few are willing to execute!
Just a quick thought - I wonder if there is a causal relationship between creating and nurturing the right mental models and having a trading strategy with a positive expectancy (i.e., the two are not independent of each other, but there is an influential feedback that runs in both directions).
I completely agree with your post Pradeep Bonde. Very insightful. If you don't have a mental image of how people are making money in the market, how the money is moving, what others have as their objectives, etc, you will have much more trouble making money.
I would say that the above takes a bit of studying in multiple areas...some economics/market stuff. some psychology. you might even want some math, science (I like using quantum physics as an analogy when thinking about the probabilities associated with stock movement).
Really, whatever you find that you can apply successfully is a boon. The more success you have doing this, the easier it will become to separate the useful from the bad.
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