Insight for Trading Decisions

BarroMetrics Views: Insight for Trading Decisions

I recently concluded a course based on the works of Gary Klein. His latest book, Seeing What Others Don’t, is a must read for traders.

In the book, Klein develops a Triple Path Model for having insights. In my view, a trader with a knowledge of the more common heuristics, will have a model, to not only gather insights, but will also have a model to combat the heuristics problem.

Figure 1 shows the model. In his model, ‘story’ means how we frame a decision or problem;  and, ‘anchor’ is the critical assumption or assumptions that we make.

Klein found that there were three models for insight. As traders, we’d probably adopt the contradiction or connection paths. The creative desperation  path usually occurs in an emergency – I’d rather not rely on insight to get me out of trouble when trading.

The contradiction path occurs when a trader challenges the assumptions made by the market. He observes the price action and challenges the assumption – using it to come up with a story that better serves him. For example, in the Wyckoff model, uptrends on declining volume suggest that the upmove is coming to an end, or at least, that a correction is imminent.

But, in the run up that began in July 2010, I realized around November, that the S&P was grinding up on declining volume. I needed a new story to explain what was happening. The explanation I came up with was that QE had distorted the price mechanism because it created a floor.  With this ‘insight’, my current S&P strategy was born: to be ‘long or out’ . (see Figure 2)

The connection path creates a new anchor from different sources. The old anchor is changed by the new insight. Again, we can use the S&P example. The insight there was created by focusing on the ‘weak’ assumption and changing it. But, the change came from my knowledge of Austrian economics. So, in that sense, the new insight was a product of the connection path.

The example shows that the paths to insight are not mutually exclusive.

I found Klein’s ideas very useful, especially when I am experiencing an ebb stage.

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FIGURE 1 Triple Path

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FIGURE 2 S&P

3 thoughts on “Insight for Trading Decisions”

  1. Many things happened without us knowing the real causes/reasons!

    Genetic Programming is a more practical approach to trading?

  2. “… uptrends on declining volume suggest that the upmove is coming to an end, or at least, that a correction is imminent…”

    – With dark pool, the value of volume analysis is questionable?!

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