Archives of “science” tag

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Every 8 Years, Your Chances of Dying Double

  
Analysis, Education, Life
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Robert Krulwich revisits the mysterious but true Gompertz Law of Human Mortality, named for the British actuary who had originally discovered this mathematical fact back in 1825.

via NPR:

Obviously, when you’re young (and past the extra-risky years of early childhood), the chances of dying in the coming year are minuscule — roughly 1 in 3,000 for 25-year-olds. (This is a group average, of course.)
But eight years later, the tables said, the odds will roughly double.  ”When I’m 33 [the chances of my dying that year] will be about 1 in 1,500.”
And eight years after that…the odds double again: “It will be about 1 in 750.”
And eight years later, there’s another doubling. Looking down the chart, you’ll see that keeps happening and happening and happening. “Your probability of dying during a given year doubles every eight years.”

A helpful, if horrifying, chart:

death chart

Inside the Mind

  
  Education
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When I impulsively take the first type of countertrend trades (i.e. missed a good trend), here’s what is going through my mind:

  1. Woah, the move has already gone quite a distance.
  2. Sigh, I should’ve taken that entry earlier. I shouldn’t have followed my trading plan so strictly.
  3. Should I get in now? No, I cannot get in any more, I cannot chase the market, it’s too risky, I have no logical stop nearby, you don’t know when it might reverse down quickly.
  4. I have already missed the move. I need to wait to enter in the opposite direction when the trend ends.
  5. The trend has gone too far, it must turn soon
  6. Look! There’s a bit of resistance, the trend is about to turn, go short! (for an uptrend)

And the countertrend trade is made! Below are what I think are the psychological process at work:

  1. Observation
  2. Regret
    • Trading is always full of regrets. You always think you can do better.
  3. Indecision, uncertainty, anxiety
    • Fear of losing out starts to take hold.
    • When you don’t have a well-defined trading plan that caters for all scenarios, or if you don’t believe in your trading plan, you will face indecision and anxiety.
  4. Resignation
    • I  accepting that I can no longer enter in the direction of the trend.

(more…)

Time – Space – Reality – Oneness – Markets

  
  Education
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What do the above all have in common? That’s right, “nonlinear” concepts!

It is interesting that one of the great minds of humanity, Albert Einstein spent his time on “nonlinear” concepts such as “time, space, reality, and oneness.” I find it more interesting that the interdependence of these “nonlinear” concepts is what makes a market tick as well.

As a trader, “timing” your trade within the “market” is based on “reality” in relation to the “oneness” of other traders and your outcome is determined by the “space” or movement of your position.

It is my opinion based on consulting with many traders that most traders incorrectly view the markets from purely a “linear” mindset and instead should view the markets from a “nonlinear” mindset as the markets are “nonlinear” themselves.  This is why rigid logical thinkers or “linear intellectuals” find trading the markets so frustrating.  Since they operate from their logical “linear” “beta” mind state, and become frustrated when market behavior does not do what it “should.” This is also why I feel that successful trading has to be both “art” & “science.”

Think about how you approach the markets and to what degree you are a “linear” vs. a “nonlinear” mindset. Also try and remember a trade or trading day where it seemed effortless and you just “let-go” and flowed with the market. In days like these, I’ll bet logical thinking was secondary to enjoying yourself, and selecting trades based on both your trading “tools” and your “intuition” which represents trading the markets as an “art” & “science.” Compare that to days when you where frustrated because the market did not do what it was suppose to based solely on logical assumptions.

Usually fear and greed are by products of logical thinking. Fear and greed are emotions and “nonlinear” in concept, but created by “linear” thinking. Isn’t it interesting that fear and greed are present in the markets and are “nonlinear” as well. Or is it because fear and greed are “nonlinear” and that they are present in the markets?

Maybe the key to a good trading system should be based on how to measure or determine “nonlinear” market events such as fear and greed. The purpose of this article is to have you look at the markets from a “nonlinear” point of view so that you can perhaps “see” market relationships that where invisible to you before.

What Happens in Your Brain When Your Market View Is Completely Wrong

  
  Education
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Eric Barker has a new article (link here) on how to win every argument. The article had a point which made me think whether the same situation happens in trading.

So it quoted an experiment by psychologist Drew Westen, which showed to supporters, footage of their favorite candidates completely contradicting himself. The experiment found that as soon as the people realized that the information contradicted their world view, the parts of the brain that handle reason and logic went dormant, while the parts of the brain that handle hostile attacks – the fight-or-flight response – lit up. Essentially logic gets thrown out the window, and it just becomes a fight where you do anything to win.

A similar situation occurs in trading, when you have a certain expectation of how the market should behave. E.g. you might for various reasons, think that the market will go up. So when the market does not follow what you expect, you might initially make up excuses for it. However when the market continues to go completely in the opposite direction of what you expect, your logic and reasoning centers would shut down, your fight-or-flight response kicks in, you treat it like a hostile attack on you, and you would do anything to win (or not lose), e.g. keep averaging down. I’m sure this sequence of events led to many traders blowing up their accounts. It is pretty interesting that the experiment showed this as a ‘natural expected’ behavior.

As always, trade what you see, not what you think.

Understanding Probability

  
  Education
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In his book, The Drunkard’s Walk, Leonard Mlodinow outlines the three key “laws” of probability.

The first law of probability is the most basic of all. But before we get to that, let’s look at this question.

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement.

To Kahneman and Tversky’s surprise, 87 percent of the subjects in the study believed that the probability of Linda being a bank teller and active in the feminist movement was a higher probability than the probability that Linda is a bank teller.

1. The probability that two events will both occur can never be greater than the probability that each will occur individually. (more…)

Inside the Mind

  
  Education
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When I impulsively take the first type of countertrend trades (i.e. missed a good trend), here’s what is going through my mind:

  1. Woah, the move has already gone quite a distance.
  2. Sigh, I should’ve taken that entry earlier. I shouldn’t have followed my trading plan so strictly.
  3. Should I get in now? No, I cannot get in any more, I cannot chase the market, it’s too risky, I have no logical stop nearby, you don’t know when it might reverse down quickly.
  4. I have already missed the move. I need to wait to enter in the opposite direction when the trend ends.
  5. The trend has gone too far, it must turn soon
  6. Look! There’s a bit of resistance, the trend is about to turn, go short! (for an uptrend)

And the countertrend trade is made! Below are what I think are the psychological process at work: (more…)

Thermodynamics and the Market

  
  Education
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Does Prigogine’s principle have any predictive market implications?

Well if you move from thermodynamics to information theory entropy, and consider the information content of market prices, then there are two clear analogies:

1. There should be local, transient edges (Prigogine, market prices self-organizing to minimize the rate of information loss).

2. Those edges are decaying (Second Principle, “Changing cycles”).

How to compose a successful critical commentary

  
  Education
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How to Criticize with Kindness: Philosopher Daniel Dennett on the Four Steps to Arguing Intelligently:

In Intuition Pumps and Other Tools for Thinking — the same fantastic volume that gave us Dennett on the dignity and art-science of making mistakes — he offers what he calls “the best antidote [for the] tendency to caricature one’s opponent”: a list of rules formulated decades ago by the legendary social psychologist and game theorist Anatol Rapoport, best-known for originating the famous tit-of-tat strategy of game theory.

Dennett synthesizes the steps: How to compose a successful critical commentary:

1.    You should attempt to re-express your target’s position so clearly, vividly, and fairly that your target says, “Thanks, I wish I’d thought of putting it that way.

2.    You should list any points of agreement (especially if they are not matters of general or widespread agreement).

3.    You should mention anything you have learned from your target.

4.    Only then are you permitted to say so much as a word of rebuttal or criticism.

If only the same code of conduct could be applied to critical commentary online, particularly to the indelible inferno of comments.

But rather than a naively utopian, Pollyannaish approach to debate, Dennett points out this is actually a sound psychological strategy that accomplishes one key thing: It transforms your opponent into a more receptive audience for your criticism or dissent, which in turn helps advance the discussion.

Improper Trading Psychology

  
  Education
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How do you know you have an improper trading psychology?  Here are a few things to look out for:-

1. Feeling too much stress
2. Successful ‘paper trading’, but not successful when trading the real markets
3. Getting mad or too joyous, depending on your trading outcomes or results (excessive highs & lows)
4. Feeling fear
5. Can’t ‘pull the trigger’
6. Fail to exit trading positions at stop loss points
7. Exit trades to relieve anxiety
8. Impulsive trading, etc.

When ‘paper trading’, you are apt not to feel the psychological impacts of real trading.  Thus, ‘paper trading’ will not generate most of the above psychological feelings.  However, when making the transition from ‘paper trading’ to real trading, the psychological issue may be felt and have to be dealt with just like when you learned the skills of your trading system. 

When you hear that trading is both an ‘art’ and a ‘science’, it often refers to the combination of psychology and feelings, with that of a technical trading approach.

In order to be successful, the psychology has to be mastered and managed.

Big Mistake Done By Traders

  
  Education
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The big mistake traders make is labeling challenges as problems.  A challenge is a function of growth, pushing one’s boundaries, becoming more than you presently are.  A problem is a shortcoming, a deficit, something to move past.
If you are never anxious, you are never pushing your boundaries.  Growth requires movement outside our comfort zones.  That brings uncertainty, nervousness, and doubt.  
The big mistake traders make is trying to eradicate uncertainty, nervousness, and doubt.  They want to trade with confidence and conviction.  They want to fearlessly pull the trigger.  So they stay in their comfort zones and they never grow and they never adapt to changing market conditions.
The trader who wants to develop embraces uncertainty, doubt, and fear.  Growth comes from mastering those, not erasing them.
The big mistake traders make is justifying stasis by calling it “sticking to a process”, “controlling emotions”, and “staying disciplined”.  Every uncertainty is a challenge.  Every challenge is an opportunity for growth.  Mastering challenges means we continually evolve our processes and make growth our discipline.  
If you want to overcome a “problem”, find the developmental challenge it brings to you.  Your problem is a gift.  Unwrap it.  Figure out how it will make you better.  Then tackle one small piece of the challenge and set yourself up for success.  Once you’ve gotten that under your belt, tackle the next piece, then the next.  Bryan was right: confidence comes from doing the things we fear, not from living a static life free of uncertainty.  

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