The Quality of Our Decisions Part 1

As traders, we spend much time in seeking more knowledge on the markets, knowledge that will provide us a distinction, a distinction that will lead to a greater edge.

But there is an area that most of us tend to overlook when looking for that edge; indeed usually when I introduce it in my public talks, I can see the audience glaze over and can almost hear the audience think: “Get over this quickly! I want the good stuff!” Well folks, “this is the good stuff”.

And the topic (drum roll please..): A Better Decision-making Process.

If you reflect on this, you’ll see why this is so important to trading, and to life. The quality of our trading, and life, ultimately depends on our actions and our actions are a by-product of our decisions.

So on what does a more robust decision-making process rest? Behavioural Finance? Logic? Creative Thinking?

None of the above. We need to go beyond Behavioural Finance; it does a great job for identifying the blocks to better decisions but some have taken a view that because we can never totally eliminate our blocks, we are doomed to poor decisions. The question is ‘poor’ compared to what? It’s like saying because we are not champion ‘traders’ we are doomed to being merely ‘good’ traders. So?

I consider myself not particularly talented in the trading arena – not a champion by any means; but that has not stopped me from making a better living than I probably could have made from any other profession and certainly better than one I would have earned from the law.

Similarly even if we never totally eliminate the psychological barriers to robust decision-making, this does not mean we should not try to make the best decision we can in the circumstances. And this implies seeking ways to improve the process.

Luckily for us, in recent years new discoveries have been made that lead us to think better. One discovery: the better decisions come from a synthesis of the right and left brain. Recently a discovery was made that an even process is to alternate between right and left brain activity. Since I read about the theory, I amended my decision-making process to incorporate this idea. It’s too early to report if there has been a bottom-line impact but it certainly feels more comfortable.

My previous decision-making process began with the right brain ‘stream of consciousness’ thinking. I would start with the 12-period monthly swing chart (yearly trend, 12-M) and work down to the 18-period daily swing chart (monthly trend, 18-d). The purpose of this step was to seek the critical question/questions relating to an instrument. For example in the S&P, on Monday November 19, the critical questions for me are:

  1. Whether the low at 1438.53 marks the termination of the correction.
  2. If not whether the end of the Zone marks the end of the correction (For those that have read the Nature of Trends this is the Primary Buy Zone marked by 1555.9 and 1370.6).
  3. Whether the high at 1576.1 identified a 13-w Upthrust Change in Trend Pattern or an Irregular Correction.

Using the various tools at my disposal, I would seek the answers using my Left-brain. The result of this process would be a strategy (buy/sell) and tactics (zone, entry and exit strategies). The final step would be to review the decision against my Behavioual Finance checklist to ensure I was not making some simple error in thinking e.g. anchoring an exit price.

I have just described the previous process. Recently I read “Think Better” by Tim Hurson and have adopted his model. I believe it is superior to the one I am using. I’ll deal with this in tomorrow’s post.

2 thoughts on “The Quality of Our Decisions Part 1”

  1. Ray

    Following from your post, as traders, we can use secondary tools of analysis to help us see the big picture, such as using oscillators. Am I right that oscillators can be used in the Right Brain process?

    A case study would be ES you referred to. If oscillator readings are on the upswing, this leads us to believe that the odds for a resumption of the prevailing midterm uptrend are improving. Should we see further advances of oscillator readings , this might then confirm a coming uptrend. Further supporting readings would be the accumulation of buying volume. However, if oscillator readings are still at very low levels, this would suggest a weak and potentially volatile market.

    With this big picture,(Right Brain analysis), we can then look at the Left Brain analysis to find the zone, entry and exit strategies.

    Am I correct to assume this is the combination of Right and Left Brain analysis before taking a trade , eg in ES, that you refer to?

  2. Hi Ana

    Sure any type pattern can be used for the Right Brain process. Woodie for example uses only the CCI for Trend, Setups, Zones Entry and Exit strategies. In his case, the CCI is both the Left and Brain tool box – much like my Barros Swings are to my trading.

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