Cognitive efficiency is the key to building expertise

Limits of short term memory

The "cognitive load theory" of learning's was proposed by John Sweller, an Australian psychologist from the University of New South Wales in 1989.

Cognitive load theory basic premise is that humans have limited short term memory but unlimited long term memory. It is hypothesized that the limited short term memory is evolutionary mechanism. It forces us to make decision. If we had large short term memory it would take long time to arrive at a decision.

But this limited short term memory puts constrain on our ability to do tasks requiring multiple steps and multiple sources of information. This poses a fundamental constraint on human performance and learning capacity. This is critical in trading. Trading is a complex skill and requires simultaneously processing many pieces of information and arriving at a decision.

When you are task focused

Let us say you learn a trading method like say Episodic Pivots which is based on post earnings announcement drift (PEAD).

I have detailed several time the steps involved in trading this method. Now if you are a new trader and trying to trade it what happens is that but you are looking at it as a series of steps to be done.

In the process you are spending lot of cognitive energy on concentrating on remembering the rules. When we try to do a task in which we are not expert we become task conscious and try and do it step wise. Because of limited short term memory this creates a cognitive load. Our cognitive process get loaded and we can not efficiently do the task.

Problem for novice trader

Same way let us say you are a new trader and decided to trade the IBD CANSLIM method. The method is spelled out and rules are known. But when you try and trade it what happens.

You are trying to remember the rules. There are several things you need to consider before you take a trade. This task focus loads your short term memory and the resulting cognitive load confuses you.

You get frustrated and start thinking the method does not work.

You decide to change method and decide to join some trading chat room. What happens, you see some strange happenings. Someone is saying CML looks like a runner. Someone is saying aggressive buyers in FIRE today. Within first half an hour you will have 50 to 60 such messages flying past you.

You have no idea what these people are talking about. They use jargon, they are in and out of trades, while you sit their trying to comprehend what is happening. So you move on to next thing.

Each of those effort is not successful because you do not have cognitive efficiency in trading those setups. The effort only leads to frustration.

Why I started focusing on cognitive load theory

Episodic Pivot is a main method which I trade and I have detailed it many times here and an the members only site have been detailing it almost daily.

In spite of that many traders had problem finding trades using the method .

That set me thinking, what can improve these peoples skill in trading a relatively simple method.

So I talked to some selected sample of members to understand what were the problem.

After evaluating the problems faced by them, the learning was they were trying to trade the method as set of steps. It was not a reflexive trade. They had not internalized the method completely and were to task focused.

That set me thinking.

How should one structure a training program which will solve this problem.

After some thinking I designed a EP bootcamp where in one month participants will have to analyse past 1000 EP trades.

Episodic Pivots (EP) boot camp starting objective

1. To understand the "concept and theory" behind PEAD
2. To gain "expertise" in analysing EP
3. To gain "expertise" in deciding when to bet big.
4. To develop daily operating procedures for efficient trading of EP
5. To simulate "a mastery experience" by structuring a compressed and focused learning experience.

Ground Rules:

1. Only participate if you are serious and have time to do research and analysis. Spectators are not welcome.
2. No non method discussion, comments, question. This bootcamp is limited to EP.There are no stupid questions related to EP. You can ask any question related to EP.
3. If your life script is YDYB please take your "but" and butt somewhere else.

Follow simple learning principle

Over learn

If you over learn it goes in to long term memory. It becomes part of your decision making process.

Over-learning is a simple technique that helps you improve your memory. Over-learning is the repetitive study of something until it becomes second nature. Even after you think you have learned something, if you continue to study it, you reinforce it in your memory. This practice not only strengthens learning, but it also improves recall speed. It reduces cognitive load when performing a task like trading.

That was the starting point at the beginning of the month and then interesting things started happening...

How the Episodic Pivots bootcamp builds cognitive efficiency

Just in 16 days the quality and speed of EP analysis amongst the active participants in EP bootcamp started improved significantly.

The kind of questions the active participants were asking 16 days ago and today are very different.

What has happened is after repeated practice and going through hundreds of past example they are not thinking in terms of process term (which has become automatic), but they are thinking larger concepts.

This is what happens when you start developing expertise.

Repeated practice decreases the cognitive load on short term memory which allows it to focus on other larger issues.

In addition those who have gone through more than 400to 500 plus examples (one person has gone beyond 1000 past examples in first ten days itself), are developing new mental model about EP.

The past EP patterns are being stored in their brain and they are being stored as a chunk.

As a result when they see a new possible EP in the morning, the long term memory kicks in and it tries to match the new EP with past examples. Which allows the person to see beyond today.

It is very difficult to explain this phenomenon to novice traders.

You become extremely efficient

When you train like this then you not thinking in terms of entry, stops, profit target, but what you see is a pattern match with past 1000 plus EP's you have analysed in last few days. All this happens in a flash of a second.

Now If yoy have to verbalize the process and explain it to someone , it is very difficult to explain step by step what thinking went in to arriving at that conclusion. The brain due to purposeful training matches the pattern to thousands of past patterns and in a flash shows you a possibility.

How can you train your brain to do this.

That is the area of expertise development. Purposeful practice is the key.

Every week I go through every EP which has happened in last one month. I analyse them to see why did they behave past their EP the way they did. What pieces of information did I miss in analysing this EP . I spend significant time on EP which I missed and which went on to make a big move. Every weekend I spend 2-3 hours on this religiously.

Te bootcamp participants experienced similar thing. By deliberately studying past 1000 EP examples, they are converting short term knowledge to long term memory where it can be processed more efficiently.

All those cumulative analysis practices add up over a period of time and the brain becomes more efficient in making these decision. That is what is called developing cognitive efficiency.

Deliberate Practice is key

There is only one way to become good at trading and that is by "deliberate practice". Those who understand that have benefited the most from the boot camp approach. They have graduated themselves in to next orbit of expertise level.

The learning model required to learn to trade is different from what many people are used to. Many people are in passive absorptive learning mode.

They believe that they can just become good at trading by absorbing what someone tells them or reading. Or by asking question.

They do not believe in practicing the skill. Or is some cases have intellectual arrogance which looks at practicing a skill as something for lesser mortals.

Trading is a performance skill. It cannot be learned by absorbing knowledge alone.

What really does "deliberate practice" achieve?

Deliberate practice leads to cognitive efficiency. Which frees up your short term memory to focus on other larger issues.

Deliberate practice builds automaticity.

Any task , be it physical task like cutting onions or a complex mental task like trading, if it is repeated thousands of time, it becomes hardwired in to the long term memory and does not require working memory for execution.

Through deliberate practice and volume practice, experts accumulate large reservoir of automated knowledge and skills. It get stored in the long term memory as one chunk.

When this happens it becomes tacit knowledge. As a result it is very difficult for an expert to clearly and completely articulate automated knowledge.

While a novice is very consciously trying to trade in a stepwise manner or in other words he or she is very task conscious, for an expert it is not a conscious process.

When trading a EP method a novice is trying to figure out how to put an order, calculate stop, set profit target, use Telechat, find 7 pieces of information about a potential EP and so on. For him each is a task to be done.For a expert all this happens in a flash without being conscious of stepwise task.

While automaticity gives you an edge as an expert, it is a hindrance when trying to teach someone to trade. Because experts have only limited conscious access to the strategies they use for problem solving or making a decision, they cannot explain their techniques in training sessions. It has been often found that the expert leave out important steps when explaining the decision.

Why sometime you need a kick in the butt

So how does one become a expert trader from a novice trader?

By doing "deliberate practice"

hat is the best way to develop cognitive efficiency.

What stops you from doing that ?

In most cases "inertia"

What is the solution to inertia problem ?