Work on procedural memory to improve your trading | stockbee

6/24/2014

Work on procedural memory to improve your trading



Procedural memory is memory about how to perform procedures.

We have as an adult thousands of procedural memory. We perform these processes without thinking.

Driving a car is about procedural memory. We drive effortlessly without thinking. We are not even conscious of the process unless something happens.

Yesterday I dropped my neighbor to the airport in his car. Because I had never driven that kind of car before I was conscious of the process and paying close attention.

Shaving, brushing your teeth, washing dishes, cooking, and many other things are stored in brain as procedural memory where we can do them without thinking.

The day you realize trading success is about developing procedural memory specific to a setup or style of trading , you will be on path to success. You will do things that will enhance procedural memory.

Trading success is about developing expertise. When you try and develop expertise you train your procedural memory.

Procedural memories are implicit memories. They allow us to lower cognitive load. They are learned intuitions.

Procedural memory is memory about how to do a process. It is stored in memory as one schema.

A process containing say 32 steps is not stored in memory as 32 discrete step but as one sequence of step. When performing that task the brain efficiently recalls all those steps simultaneously so you can do the task effortlessly.

Procedural memory helps free up the brain to do other things.

It frees the brain by reducing cognitive load. We have thousands of procedural memories developed over our lifetime. They make our life easy.

As a infant we have very few procedural memories but we quickly build them as we grow and they become part of us.

For example take a simple skill like swimming, it is a procedural memory once you develop it you can perform it without thinking or without focusing on a step by step sequence. But it takes us some time to develop.

Same is true of trading . If you read about trading or buy trading manual you will not develop procedural memory. You develop trading related procedural memory by doing actual trading . If you do a process thousands of time you develop procedural memory.

How many hours and tries are required to learn to swim or perform dance or gymnastic. It is same for trading.

If your setup is fast setup requiring fast entry and exit like say day trade , then procedural memory is even more important. You have to perform the task at speed without thinking too much.

New traders spend too little time developing procedural memory. Before they can develop procedural memory they switch to new ideas and setup. One day they ride bike for few hours struggle, next day do few hours of swimming and give up because water enters nose and ear, next day they try something new. In the process they do not have procedural memory for setup.

Procedural memory also allows us to do vast number of day to day tasks. Imagine if you had to learn to drive everyday, or learn to walk everyday. Life would be impossible without well developed procedural memory.

Same things happens in trading. As a trader you develop hundreds of procedural memories to make your trading effortless. Where to enter, where to exit, where to abandon a setup without waiting for stops to hit, how to determine risk are all procedural memories developed through practice.

Finding anticipation setup is procedural memory. Once you develop it , you can quickly go through 400 to 500 stocks and identify those 5 to 6 good setups. No amount of instructions and manual can make you learn that skill unless you do it daily for say 90 to 100 days.

Most successful traders who survive the market for many years have developed a procedural memories specific to a style of trading or a setup.

They can instinctively trade those setups without thinking about individual processes or steps involved in that setup. They are not conscious of the steps.

A novice watching them trade many times do not understand their decisions. Many times they get out of a trade just before it hits a pothole or avoid certain trade that novice will take. Lot of it is instinct developed as a result of procedural memory development. It is like a driver instinctively hitting breaks at sign of something on the road.

For discretionary trading it is all about procedural memory development on a specific setup.

If your efforts at training procedural memory to trade a setup or style are successful then you will become efficient in trading that style.

Once you learn a setup it become relatively easy to develop procedural memory on related style or setup.

But it is difficult to develop procedural memory on another instrument or style. That is why you will see many successful traders focus on very narrow niche in the market.

Some focus on growth investing , some focus on value, some on options, some on futures, some on currencies.

Within that they focus on very niche setup. Some trade say growth stock as swing trades, some trade them as position trades. These two setups require distinct procedural memories.

Most successful traders learn by trial and error that sticking to their setup is best because when they do it the procedural memory automatically kicks in.

As against that novice traders are ambitious, they want to trade as many setups as possible. They don't want to miss out on any style or instrument like option or futures. So they try and simultaneously develop procedural memory. That obviously leads to failure.

If we know that the key to discretionary trading success is procedural memory then why is it difficult to develop procedural memory?

To develop procedural memory you need highly structured environment.

When you learn to drive, it is done under structured environment. You learn it in stepwise manner under close supervision. There is someone sitting next to you closely supervising every step and also ensures you don't get killed.

Every month you will see some young kid getting killed in car accident, and the reason is largely to do with lack of well developed procedural memory and bravado.

As against that much of learning to trade on your own is unstructured and unsupervised process unless you join a trading firm or a Wall Street trading house or bank.

You are your own instructor and you need to create your own structure and you need to give yourself correct feedback and you need to ensure you do not get killed by blowing up your account. And more importantly you need to persist for months in learning stage still it becomes effortless exercise.

Everyday I get around 10 to 15 emails from people asking for trial and I most of the time even do not answer those emails now days. Those people have no idea about how trading works.

If you want to develop trading procedural memory and make thousands or millions the first step is to put all your effort in developing procedural memory. It is not about trial, it is about the 500 th attempt and the thousandth and three thousandth attempt that makes you effortless. That is what develop procedural memory. You can not do it in 15 day trial.

If you read the classic Wall Street books like How I made 2 million dollars in stock market by Darvas or Reminiscence of a Stock operator, you will see that much of the struggle depicted in those book is about trying to find a setup and a process and sticking to it.

Once Darvas found his setup and developed a process it was easy. In Livermore case he went from setup to setup and from day trading to position trading before making big money.

It is the same thing that happens on Stockbee site hundreds of novice join every year. Some give up in few months , those persist for months , six month, a year at some stage develop procedural memory and then they develop their own setups .

Some still stick around , because they find the environment enriching and motivating. They like learning from others and continue to improve.

Some become very good at particular style or timeframe like day trading . They start their own site. Some are scared of sharing their setup and secretive, they spend time talking in riddles. Some do not want to help others. But that is what makes the world interesting . Not everyone is motivated by helping others.

The Stockbee site fosters such ecosystem and survives the process as new traders bring in new ideas and new energy . And some old traders here take on mentorship role to guide newcomers.

As a novice trader if you understand the role of procedural memory in trading you would approach the task differently. You will set process goals as against monetary goals.

You will focus on well developed setup idea with step by step instructions.

You will try and find someone to supervise your process and ensure you do not get killed during the earning process.

In most procedural memory development situation a apprentice model has shown to be most effective for learning.

When you attempt to develop procedural memory on your own, unless you are extremely motivated and driven (or the correct word according to psychologists is you have very high self efficacy beliefs) the task is difficult. That is why you will see few extremely motivated individuals make it in this field.

This is the reason most ordinary and less motivated traders fail before they can achieve profitability.

They blame markets or other things for it but in many cases the fault lies with failure to train procedural memory.

In order to develop procedural memory for any given time frame or style or set up first you need to start with well defined setup with clear step by step process led out with clear explanation for each step.

For example if you were to decide to trade a swing trade setup, you need clear well defined highly structured process that you can follow and master till you can do it on your own without supervision. That is why I and many other traders here repeatedly share processes, setup and repeat things till people get it.

That is why this site puts so much focus on becoming process oriented. The daily posts like Night Time is right time, Good Morning Wall Street, Anticipation as your tool box and so on are designed to drive the importance of procedural memory.

Develop process flow and develop procedural memory. Once you do that you are on your own.

2 comments:

SMART Trader said...

Hi Pradeep

I have reproduced your post in my blog without your prior permission. I will remove it if you have any objection.

http://niftynirvana.blogspot.in/

Long back I was a subscriber of your paid blog and learned a lot from you. Thanks a lot

Regards
Rajesh

Pradeep Bonde said...

Rajesh No problem