"The Emotions of Math"

As trading becomes increasingly more statistical in nature one must acknowledge the birth of another question, what is the nature of statistics? I am rapidly approaching an interesting conclusion…emotions.

The general belief that systematic, analytic models are less emotional than discretionary trading is fundamentally flawed. Statistics, in any discipline, are a 2nd mover...the 1st being the cumulative human actions that stats must, per se, be based upon. So then stats, probabilities and the like simply quantify the most ubiquitous element of human nature, emotions. This suggest that equations, assessments, and even math itself is deeply rooted in emotions, for without such they cannot noticeably exist.

The math market, or stock market as many prefer to call it, is the finest example of mathematical emotions. Black boxes simply do a better job, at times, at recognizing the patterns of past emotions without compounding trading decisions with the convolution of real-time emotions. The vacuum of code then is advantageous because it minimizes the indecision or delay one’s nervous system causes even for the most robotic of traders.

A moderate embracing of our emotions as traders may result in more profitable trading than ignoring the same to become more “robotic”, for even robots have human creators.

The stock market has no abstractions, or haphazard components, only actions and re-actions that are perceived as such to the mechanically bent trader.

Any suggestions, disagreements, and thoughts are very much welcomed.

-Ross

 

Honestly, you haven't been in this industry long enough to make conclusion like above. Well...:

1. You haven't seen a good discretionary trader.

2. You mention about "psychological" aspects. You've been reading ET too long. Like I mentioned above you are basing your conclusions against "newbie" traders, not real ones.

3. Are statistics a representation of emotional... blah.. blah.. blah...??? Simply... Trade the edge, not patterns.

4. Buy-and-Hold, Long-term trend-following - VS - Swing, scalping, and high frequency trading... Are both emotional??? Is there an exception to your inclination? They're all the same to me.

 

Wow...it's so difficult to keep a conversation on topic. Gann, first you have no idea how long I've been in this business, second, I work with some of the most profitable "discretionary" traders, at one of the largest hedgies in New York..that noise you hear is your theory crashing into the fact wall.

Anyone thinking that I'm speaking of "trading psycology" alone is vastly missing the thought. The point is we wrongly buy into the asumption that stats, charts, spreadsheets and the like exist with a higher level of intellect, when in actuality they are simply a clean composite of dirty emotions.

-Ross

 

I agree 100%. But dont really understand the point of your post(maybe i`m too high on rally right now to comprehend ).

Of course we all know the mkt is nothing more than numerical representations of crowd psychology and automation can cut out emotion to some extent. But the automater seeing his system in a drawdown can always fiddle. As long as the financial markets are controlled by humans emotion will exist. If they didn't there would be no market at all and we would be SOL.

 

I think Ed Seykota said before that your system is the emotions that you refuse to acknowledge.

Woody Dorsey wrote the book "behavioral Trading" from his theories of mass investment behavior. Its worth reading to see how he makes a living from an abstract set of ideas about the Markets. Apparently some large portfolio managers subsribe to his service, and he runs a hedge fund with $30 or so million I believe.

Its all basically semiotics, which his newsletter is called "Market Semiotics"

 

Indahook,

The point of my post is for traders seeking improvement to re-evaluate the concept of trading without emotions, as I've heard so many teach over the years.

I think that is a myth, a factual impossibility. One cannot swim in a waterless ocean.

-Ross

 

Ah. I do believe it is impossible to be that stone cold emotionless trader of lore. I`m of the belief that to recognize the encroaching emotion is far better than to try and suppress. In fact I have stated on ET before that my body gives me "tells" when i`m on violating some part of my plan. Burning face..increased blood pressure..etc. When this kicks in my fav thing to do is turn off the screen and take a quick walk to think about what i`m about to do and why.

The first step to any sort of recovery is acceptance.

Good thread. Thanks.

 

What exactly are you getting at here? That market statistics are flawed?

Then you say this:

"The math market, or stock market as many prefer to call it, is the finest example of mathematical emotions. Black boxes simply do a better job, at times, at recognizing the patterns of past emotions without compounding trading decisions with the convolution of real-time emotions. The vacuum of code then is advantageous because it minimizes the indecision or delay one’s nervous system causes even for the most robotic of traders."

Pattern recognition of past emotions? At what level?

I watch a market trade, the price seems to like 1250. It hits that price and bounces off it... then it breaks through that support, touches it again as resistance, etc, etc... There is nothing that can statistically predict this other than the "emotion" of the market at the time. You learn this by participating and getting a feel for what types of market actions suggest price breaks rather than price holds, not by using past "emotional mathematics" (terrible oxymoron there BTW).

Here's what computers can and cannot do - they can compute amazing sums in microseconds. They cannot recognize a complex shape nor can they quantify emotions (ask a computer to identify a persons mood by analyzing the face - because of the musculature of the face, the amount of processing required is 2^600 ... or something crazy like that, don't quote me on this). This so called "real time convolution of past emotions" is an interesting thought experiment but do you really understand the mathematical details involved in this? Emotions are complex on their own right and you are telling me you can quantify them using statistics and then run a real time convolution? I can point out at least 10 computational hurdles in this idea that I doubt any computer can overcome (unless you have damn sophisticated artificial intelligence algorithm that I've never heard of...)

Again, until the "robots" develop a human interface that can mimic the complex human memory process and, learn how to emotionally interact with humans, the discretionary trader will always have a tremendous advantage. 20 years from now - I belive technology might overcome this obstacle, but, even then the market dynamics will probably account for this. Case in point, a human can always outsmart a machine (but not out-compute it).

 

The natural question is can one be a very succesful trader, in today's market, simply by looking at price behaviour? No charts, no fundamental research, no objective analysis, just watching numbers go by and trading off feeling...

Without experience I don't think so, but for the experienced trader sometimes the best thing to do is now simplify and trade off what it took years of looking at patterns to recognize. My basket has become such a part of me that I don't need to look at any of their charts...each number along the price scale has its own name and your can recognize them as they go by.

Just my observation.

-Ross

 

Experience being the key word..I say 100% yes.