New Traders - Resting Potential

Resting Potential: Success in Life and the Markets

Neurons send messages electrochemically. This means that chemicals exchanged within and between neurons cause an electrical reaction. It is helpful to think of the process of a neuron firing in similar fashion to volatility mean reversion.

An action (or “spike”) of a neuron is caused by an exchange of ions across the neuron membrane. When a neuron is “resting” its electric charge is -70MV. At this state, a stimulus causes the sodium channels to open. And because there are many more sodium ions on the outside of the neuron than on the inside (sodium ions are positively charged), the neuron has a net negative charge. To correct this, the neuron opens its sodium channels and sodium ions rush into the neuron. The charge becomes progressively more positive. As the sodium rushes into the neuron, the charge of the neuron increases. As it approaches -55MV, the neuron becomes more depolarized (increasingly positive). To further this process, the potassium channels open (which take longer to open than the sodium channels). Potassium is positively charged, and its rushing out of the neuron constitutes the electric spike or firing off of the neuron. However, the removal of the potassium (the “spike”) decreases the net positive charge of the neuron, and it becomes increasingly negative until the neuron again reaches -70MV, when the process repeats itself.

The process of a neuron firing is made possible by its resting potential at -70MV. At that charge, the conditions are perfect for it to react to immediate external stimuli – specifically, positively charged ions.

How does this process replicate itself elsewhere?

Which army has a better chance at winning in battle – the one that trains and builds up during peace time or the one that imposes a draft and begins training upon the declaration of war?

Who has a better shot at being “discovered” – the actor who works a 9-5 and goes on an audition one per month and maybe does a show in his small town once per season or the actor who moves to NYC or LA, works as a waiter at night and toils away each going from audition to audition and rehersal for off-off-off-off Broadway plays?

Who has a better chance at winning over the object of their affection – the one who spends his or her free time at the gym after work each night and who reads up on current events or the one who heads to the bar at 5pm for happy hour and spicy wings?

Success in life is about Resting Potential – specifically how prepared we are to seize opportunities when they arise and how well-capitalized (not necessarily in monetary terms) are we to create our own opportunities.

With the current growth of the prop trading industry, resting potential among independent traders could not be of greater importance.

I know many traders who read the tape and who do not take the time to see the forest from the trees. Inevitably, these are those who exit winning positions prematurely and who’s inevitable losses are linear with their gains. Spending time looking for fractals or simply being more prepared for the trading day (not every day is an independent trial) would put them in a better position (resting potential) when it comes time to act in real-time market conditions.

Some questions for the aspiring trader should be:

1. What are you doing (currently) in your life to increase the probability of your success in trading?

2. Are you personal expenses (rent, car lease, etc) conducive to you being able to live without an income for some time? And for the experienced trader, do you have savings to replace your account in the event of a losing streak?

3. Is your strategy non-random?

4. When reading books about the market, are you simultaneously superimposing realistic market condidions (i.e., order flow) on top of whatever strategy the book or article is advocating? For example, if you are buying a breakout strategy using an intra-day system, what’s the likelihood of getting filled where you need to in order to profitably execute such a strategy?

I think the biggest elephant-in-room for the prop trading industry today is that firms do not care about the resting potential of their traders. And worse yet, aspiring traders are not asking the correct questions of themselves.

 

Great post Fader. I too agree that the correct "balance" is needed in order to trade effectively and is needed to be happy and successful in most of life's arenas.

Great post!

 

Don't know what resting potential has to do with the examples given. The examples are actions to increase the number of neurons firing at a given time to achieve desired objective. They have nothing to do with getting them into their resting state.

 

The point is that if a neuron were not negatively charged, it would necessarily not be able to be acted upon by sodium oins. This is why it reaches a maximum and releases potassium ions. The abscence of action can be said to be "preparation" for action.

And I don't feel many traders are prepared for action by satisfying the necessary conditions to increase the likelihood of success in trading.