Time Modulators Imagine that you are standing on top of a high-rise building and below you is a busy street intersection with the constant flow of cars in four different directions. Even if you had no idea about the intersectionâs traffic rules, after observing its busy life for a while youâd notice that if a car had a blinking light it needs to turn left or right while giving way to cars that are moving straight through the intersection. You would also notice that when the cars are turning right they will stop to let pedestrians cross the street. Soon you could predict what should happen next when you spot a situation that you either witnessed before or you now possess an understanding and the logic of the traffic rules that govern the patterns. Imagine now that you had a video recorder and filmed this intersection for five straight hours without thinking or noticing any patterns or rules about the movement of cars. You were just filming and your main concern was to make sure that you documented everything that happened during these five hours. After you were done you came home and watched this video. However, for whatever reason your play back function started to play your recorded footage 1,000 times faster than it should have. Looking at the screen you would not be able to make heads or tails of what was occurring. The movement of cars would resemble to you a chaotic movement of bees hovering around their beehive. The traffic rules would become virtually un-discernible and no matter how long you would watch this video you would not be able to understand what was going on and how to predict or even anticipate what might happen in the very next second. The cars on your screen would be moving too fast to leave you any hope of comprehending their mutual behavior. As a result, you would have no choice but to consider the logic of the intersection as indiscernible and the car movements utterly random. The next day you decided to fix your recorder and brought it to your neighborhood camera repair shop. You have picked up your camera the day after and tried to watch the intersection video again. However, this time your recorder played back your video 1,000 times slower than it should have. All you would see now is a virtually static picture with the cars moving so slow that it wouldnât make any sense to you. Even if you would watch this video in its entire length (spending 5000 hours to watch it) you would forget what had happened a while back and you would again consider the logic as unpredictable and the cars movements very slow and random. The result of this mental experiment is quite obvious. We as humans can form our opinions and comprehend our environment only if the processes we observe have a very specific and, frankly, quite narrow dynamic range. In order to use our natural, genetically inherited abilities to understand logic, recognize patterns, develop associations and comprehend situations the processes we observe must be in a dynamic range that suits us best individually. Experimenting with this concept for several years (a subject for another white paper that is on my âto doâ list) I have discovered that the best dynamic ranges for different people vary rather significantly. The reason why the Great One - Wayne Gretzky could âseeâ split-millisecond scoring opportunities was because only he among all the players on the ice could process the development of game situations in such a highly dynamic range. That is why my dear friend Simon can âclearly seeâ the patterns in the NYMEX Order Book that most of us cannot.
It appears that in order for us to comprehend highly dynamic or incredibly slowly developing situations we must have a device that could âtuneâ the time scale of the observed reality to match the most suitable for our individual perception dynamic range. These devices should play the role of a slow motion video of a bullet hitting an apple that would enable us to âseeâ the precise motion and impact of the bullet. Those devices in our world are called âTime Modulatorsâ and they are an essential part of every Intuition Amplifier I have ever built.
I beleive that in the previous thread we talked about the place of this research in the common area of Trading Decision Making. I have proposed a few definions. Here they are: Technical Analysis (TA) The way of studying securityâs price and/or its volume changes that occurred over time. The data for TA is usually presented via 2 â 3 dimensional charts where each of the data sets (price, volume, time) are plotted using their individual scales (linear, logarithmic, event driven etc.). The objective of TA is to identify possible sets of stable causalities between specific sequences of price-volume-time events observed in the past and sets of price-volume-time events that might occur in the future. The philosophical foundation of TA is based on the belief that a security price-volume data fairly and adequately represents all known information about that security. It assumes the existence of the âmarket memory effectâ where events that occurred in the past have some degree of influence on the events that occur in the future. TA analysis is also a statistical study that assumes non 50/50 probability of specific price movements that are preceded by the events that is believed to have caused the similar price movements in the past. In other words, TA states that if certain sequence of events occurred in the past it might maintain their causality structure in the future.
Quantitative Market Analysis (QMA) The way of studying markets through the analysis of artificially created, abstract (mathematical, statistical, mechanical, electric etc.) models that exhibit similar (to real markets) behavior when subjected to similar set of stimuli (market driving events, securityâs fundamental data, specific news, price, volume, bid, ask sequences etc.). The foundation of QMA is the belief that created models will maintain a certain degree of correlation with the real markets over reasonable period of time. QMA usually relies on: 1. Static (permanent) models (with the rigid logical inner-structure) that could adapt their key parameters to ever changing market conditions in order to maintain their reasonable accuracy 2. Dynamic models that adapt to markets by changing their rule base. QMA assumes that market have the finite variety (W.R. Ashby meaning) therefore they could be adequately represented by the models of manageable size and complexity. It also assumes that the computation times to determine the modelâs reaction will be short enough to be efficiently implemented in real-time market decision making.
Behavioral Market Analysis (BMA) The way to study market ANOMALIES through psychology based reasoning. The philosophy of BMA is based on the belief that psychological reactions of market participants to certain types of events systematically influence markets movements. BMA has originated as an alternative to the efficient market hypothesis and states that the market behavioral cannot be reasonably presented using the assumption of perfect investor rationality. BMA attempts to explain the marketâs behavior through actions of its participants who mostly look out for their self-interest thus forcing the markets to exhibit periods of severe inefficiency. The two major working ideas of BMA are: 1. Most market movements are the results of the market participants making decisions based on subjective impressions and beliefs and not on rational analysis. 2. The way market situations are framed and presented to market participants will influence their decision to buy or sell securities causing heard-like, spontaneously synchronized waves of actions that move the markets irrationally. BMA uses behavioral and psychological models to anticipate the most probable market reactions to certain types of events.
I believe that I have proposed that my research is in the area of Market Perception Analysis (MPA) that is different from all the above methods and it is based on the objective studies of Intuition and Subliminal decision making as well as extracting the knowledge of the market participants perception in real time.
And now is the last piece of the material that I have posted just before the thread was lost. Perceptions appear in our mind in sequence. It is virtually impossible for a normal human being to retain awareness of two or more perceptual states at the same time. Look at the picture above. You either see a musician or a girlâs face, but not both at the same time. Your mind shifts between the images without retaining both of them simultaneously. One perception magically appears instantly replacing the other. What this experiment proves is that our conscious attention is very much selective â we can only focus on one perception at the time. Similarly, while you are trading e-minis, for example, you are being unaware of the room temperature or whether you are thirsty or not, or if your nose is in your line of vision. But they are there (didnât you feel like having a nice, cold beer just now? And that nose, where did it come from?). When you are at your buddyâs super bowl party you can listen to one conversation or another, or you can focus on the commentator but not follow them all at the same time. You can shift between the conversations but you can never perceive more than one. I have conducted numerous "dichotic listening" experiments in my lab where the subjects wear headphones that separate verbal messages to each ear. In each of the experiments the subjects later could only recall separate consecutive sentences but never both conversations. So, why this is important? It turns out that although we can only consciously be aware of one perception at the time we are still very much influenced by the unperceived information and we maintain quite significant level of awareness of many things that we cannot consciously perceive. Our awareness level is so high that even slight increase of the âbackgroundâ information significance can instantly shift our attention from one perception to another. In my headphone experiments I have inserted the unexpected swear words into some phases creating slight shocks in people who were listening to those separate conversations. In 99% of cases people were able to recall the phrase that followed right after a shocking swear word, but not the phrase that was playing in the other side of the headphones at the same time.
If you are day-trading AAPL, for example, solely focusing on your 5-min charts you are completely unaware of the âjibber-jabberâ that is coming from your Bloomberg TV playing on the background. But as soon as one of the âtalking headsâ on TV pronounces word âAppleâ your attention instantly jumps to the screen and you suddenly become aware of the news piece that is being played. What a marvelous built-in radar we have! Our intuitive, subliminal surveillance system is always ready to help us, it is always ON and tirelessly scanning our environment. But do we use it efficiently? Unfortunately, we do not! Aside of slightly amusing optical illusions (similar to one shown earlier) and somewhat rudimentary attempts to quantify the perception switching mechanisms we have not developed any useful tools to amplify and efficiently use our subliminal ability to track large quantity of potentially useful and, occasionally, critical information. Sometimes when I drive home from my office (about 1.5 hour drive one way) I start thinking about one of the algorithms I am working on. My mind is totally preoccupied with it and I am consciously completely unaware of what is going on around me. However, I am still following the road, taking all the right turns, stopping at the traffic lights, checking the rear view mirrors when changing lanes etc. My âautopilotâ safely navigates me all the way to my house without me remembering a thing about that long drive. Sometimes when I come home my wife asks me how did I like the âlovely flowersâ that city planted on both sides of the bridge. I could never answer. I did not see them. My brain was focused on the mental challenge that I entertained myself with but at the same time I was able to register and react to staggering amount of information that was required to be processed during my driving. I am sure that somewhere in the corner of my sub-consciousness I have registered the flowers but since my perception was switched to other things it appears that I have completely lost the access to this information. Or have I?
In 2005 I had a group of 38 traders that were given a free access to our trading room so that they can trade, learn, communicate to each other, experiment with different market indicators etc. We even sponsored their trading accounts so they had no fear of losing their own money. Each of the traders was asked to do his/her best to develop their unique trading style and to make as much money as possible (with pretty generous sharing of the profits). During this six month experiment I had an opportunity to conduct lots of psychological experiments that helped me to understand some aspects of intuitive and subliminal thinking associated with the trading decision making.
One of the experiments has been specifically designed to investigate our ability for subliminal âpreconditioningâ. Since all the traders were situated in one big room that we called âthe aquariumâ (hence its glass walls) we have created and daily played the audio tape that sounded exactly like one of the business news broadcasts. In this audiotape there was constant mentioning of nine securities with the ticket symbols that did not actually exist. Every morning for about 40 minutes we had the âtrading orientation sessionâ during which we have talked about different strategies, mistakes that traders should avoid, money management techniques etc. During all of those sessions the tape we created was quietly playing on the background. After a week I have interviewed all the traders about their trading performance and during each interview I have asked them to recall any fragments of the news cast that was playing on the background during our orientation sessions. Obviously, there was very little of any recollection. However, on the very next orientation session I have presented a list of about 100 stocks that included those nine fictitious ticker symbols and asked all the traders to pick ten the most popular and familiar to them securities that they would include in their active trading portfolios. To my obvious delight all 38 traders have included at least three non-existing securities from the list that we have created. When later on I have asked them why they have included those securities they all admitted that the ticker symbols of those securities sounded familiar and they were pretty sure that they knew about those securities and heard frequently about them on the news. They even believed that those securities were featured on the CNBC programs like âMad Moneyâ hosted by Jim Cramer.