Slow Trader

Tag: Daniel Kahneman

  • To master the game takes time

    IBM’s computer “DeepBlue” has been beating the very best chess players for some time. Now Google’s computer “DeepMind” is beating professional players in the ancient Chinese game of Go.

    We have likened chess to trading before. In his book “think, fast and slow” Daniel Kahneman explains how chess is like learning a language, but more so. There are a good deal more chess moves than there are letters in any alphabet.

    Trading, and the number of trading signals, is another level again. Also institutional traders can afford the very best computers, and more importantly, the very best programmers of algorithms. The big difference, however, is that, unlike Chess or Go, in trading we are not competing against the computers, but with them. With them we win, against them, we lose. We need to think in terms of algorithms, we need to be very precise. That involves our system two (logical) thinking not our system one (instinctive) thinking.

    Kahneman explains that it takes about 6 – 10 years, 5 hours a day amounting to about 10,000 hours, to become a master chess player. We know that this is true for other skills: a junior doctor about 7 years, a tennis player takes a similar time (the 17 year old that wins Wimbledon started at age 7, or earlier) and as a fighter pilot I considered myself no more than competent after 7 years.

    Trading has three distinct areas that need to be mastered: trade knowledge (is price to go up or down and over what time frame), the management of a trade and the emotion of trading. Each of which need to be mastered equally.

  • Trading is logical not intuitive

    An essential lesson to learn, as a trader, is not to use instinct.

    Beginners (traders and investors) rely almost entirely on intuition. We buy stocks based on the image we have of a company, or we take a trade based on a chart pattern; a pattern that has poor context.

    In his book, “Think Fast and Slow”, by Nobel Prize-winner Daniel Kahneman, he explains the two systems that drive our way of thinking, system one and system two. System one being fast and intuitive and system two being lazy, slow and logical.

    The intuitive trader, the beginner, will interpret trades from patterns that merely feel right –  but they are patterns not based on contextual logic and not based on system two thinking. A profitable trader, however, will look at a trade through system two, a trade based on “good old” slow logic.

    To overcome system one we need to force ourselves to employ lazy system two.