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The Unseen

August 14, 2013
15 people like this post.

“I believe in the sun, even when it doesn’t shine.

I believe in love, even when it isn’t shown.”

What other things do you believe in that are unseen? Gravity? Radio waves? Microwaves?

Gravity, causes the apple fall to the ground from the apple tree. Radio waves, used by your ‘wireless’. Microwaves, used by mobile phones.

Why do you believe in these concepts even though they are unseen? How would you explain what radio waves and microwaves are to somebody that has never used an FM/MW/SW radio or mobile phone? Even more importantly, how would you get them to trust that they work and won’t harm them, physically, mentally or emotionally?

Why is this a topic for a blog posting on a financial services website? Well sometimes when explaining something as unseen as an ‘edge’ in the market and how and why it works, I feel like I’m trying to explain the existence of radio waves to somebody that has time-travelled from the 1820’s.

Maybe I shouldn’t feel like this because most people today still do not understand radio waves or have never had the workings of ‘wireless’ radio explained to them, but they believe that radio waves exist, work and won’t harm even though they are unseen. They accept that there is a scientific explanation for how a ‘wireless radio’ works and thus trust and therefore are comfortable using a ‘wireless radio’.

An edge in the market is similar. It is unseen, intangible and works. And yes, there is a scientific explanation of how and why an ‘edge’ in the market works. See my many postings on this subject over the last few years.

Some readers get it totally, others get it but do not believe or trust it and others just don’t get this ‘edge’ thing at all, even though they may be active investors in the markets.

Why is it so difficult? Here are some possible explanations as to why many battle to get it:

  • The rate of radio and microwaves completing an event successfully is very high, close to 100% (interference and noise causes < 100%). This could be viewed as a ‘win rate’.
    • The ‘win rate’ of a positive edge in the market ranges from 30% to 65%, depending on the strategy being used. However, an ‘edge’ in the market involves more than just a ‘win rate’, it also requires a calculation for a Profit Ratio (also called a Payoff Ratio).
  • There is money involved when trading the markets and, for whatever reason, human beings have been programmed over the centuries to put a lot of meaning into money, probably too much.
    • This means that when money is lost in one of the 70% – 35% losers in any given ‘edge’ the negative emotional pain is far greater than the positive emotional gain from a winner. Money from the winners is taken for granted whereas money from losers is magnified and this causes all sorts of emotional and mental issues that need to be overcome to become successful at investing over the long term.
    • Radio and microwaves not working don’t cause emotional or mental pain, or very little (although these days, with the way that some people react to their mobile phone not working, maybe this is changing J).
  • The effect of ‘small samples’.
    • Human beings opinions seem to be affected by a ‘sample of a few’, particularly recent occurrences, setting their entire opinion on most things in life. With a few things in life there should be ‘one strike and you are out’ but with most a ‘sample of a few’ simply will not work as negative outcomes occur far more regularly than we would like to accept.
    • This may also be termed the inability to see, understand and trust the big picture.
    • This is also why finding principles founded on beliefs, in any given walk in life, is so important.

Other unseen ‘laws’ that you may have come across that don’t have a near 100% ‘win rate’ but do deliver an edge when executed over a large sample:

  • The ‘law of attraction’ – you attract what you emanate, but not always.
  • “Practice makes perfect” – sometimes no matter how hard you practice the outcome just doesn’t seem to materialise.
  • The ‘law of visualisation’ – manifesting unseen things by ‘seeing’ them in your mind.

They don’t have a 100% hit rate because there are always many other variables at play over which we have no or very little control that can affect them.

Edges in the market work, there is no doubt about this. This can and has been demonstrated mathematically and in real life execution. The mathematics of expectancy, volatility, position sizing and compounding behind market edges, such as SPA3, is unseen, yet they do work and work very well.

But why not for everybody? Because we don’t see what there is to see, we only see what we are conditioned to see. You can change your conditioning if you desire to ……

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15 people like this post.

Comments

  • glen says:

    You said “This is also why finding principles founded on beliefs, in any given walk in life, is so important”. As Howard Coleman (Team Invest) states “beliefs are not based on evidence”. The Human species begins with a ‘belief’ (hypothesis) then looks for evidence to back the claim. If no evidence is forthcoming, the theory remains just that, a theory. Some theories are proven, in which case, they become ‘fact’. I don’t “believe in the sun, even when it doesn’t shine”. This is lovely poetry, but very deceptive language (is has a religious tone). In truth, I ‘know’ the sun exists, hence, I don’t ‘believe’ in the sun. The sun is a proven thing, and shouldn’t be used to strengthen your case. Ditto, ‘love’ which is merely and emotion, as is ‘hatred’. Further, gravity, radio waves and microwaves are all proven scientific ‘facts’ and not mysteries to us.
    Indeed, without evidence, I refuse to believe. I see no evidence of gods and therefore don’t believe in them. Your little write up has a religious tone.
    Regards, Glen.

  • Gary Stone says:

    Response to Comment by Glen:

    Just trying to use some ‘logic’ to explain an unseen concept such as an ‘edge’. The ‘logic’ that I have used in this blog may resonate with some and clearly will not resonate with others, such as yourself. I accept that.

    By the way, gravity is NOT proven by science and is still a mystery. They still do not know WHY and HOW it occurs. They have proven that what they call gravity exists, and its speed, but it remains one of the many (potentially millions, or even billions – we don’t know what we don’t know) so called ‘facts’ that are mysteries that scientists still cannot explain.

    I assume that you disagree with Howard Coleman as your 3rd last sentence contradicts what you have quoted him as saying.

    Regards
    Gary

  • Dimitri says:

    Thank you Garry for the interesting comments.
    I am sometimes amazed how people react, especially when someone in his/her attempt is trying to make a point in a particular subject and somehow there is a remote potential reference to God, are so irritated.
    I found Garry your comments that had nothing to do with religion and you just try to make a point about having a “trading edge” and believing on it. Many of us that we are trading for some time, I believe , we total understand your comments.
    Thank you again for the plethora, over the time, of meaningful and interesting comments about trading and somehow through trading, human nature and life.

  • Michael Cullen says:

    Hi Gary,
    I quote “But why not for everybody? Because we don’t see what there is to see, we only see what we are conditioned to see. You can change your conditioning if you desire to ……”

    Well, I know I am preaching to one of my own kind, but it truly is amazing how beliefs block your vision. I have this experience particularly from what I lived with in learning to execute my exits. When I was trying to overcome my poor execution, I started to write down as honestly as I know how, exactly what went on in my mind as I executed an exit. I came to realise how blindly impulsive I was, driven by a need to be right, to do all things perfectly as I had been trained growing up, to gain release from the tension I had built up during the trade, to act prematurely to avoid a marginal profit turning into a loss,then to see it go on to make another 30 points,the craving to make every trade a winner, to get it right. All these thoughts, barely conscious acting to block, to be inconflict with the principles that I also believed, like my success is never tied to any one trade, take every signal because you don’t know what the market will do next, employ your edge over as large sample as possible.

    And this all occurred while I was trading with minute position size, not $1000s per trade, but cents per trade. It made no difference to my blindness, my impulsiveness, my belief conflicts, that I was trading for cents and couldn’t possibly do any financial damage to myself.

    All this is to say in many words that beliefs, and in particular conflicting beliefs, while remaining unidentified, will cause you to not see, and not want to see, what is right before your eyes. It takes an enormous amount of personal integrity to place your trades and identify the beliefs that are driving your actions, write them down, and depower the offending beliefs.

    Mark Douglas talks about these problems, and a bit about technique of empowering new beliefs, but not about the actual battle that you must fight with yourself to actually achieve it.

    Getting to “see” what you can’t now see is something more difficult than most people will ever experience, so it is not surprising that most people are blind.

    “You can change your conditioning if you desire to ……”

    Not to know, that is a problem.
    Not to know, that you don’t know, that is blindness.
    Not to know, that you don’t know that you don’t know, that is tragic!

    Cheers,

    Mike Cullen

  • glen says:

    Hi Gary,
    Thanks for responding. Firstly, “beliefs are not based on evidence” is in no way contradicted by, “without evidence, I refuse to believe”. In truth, they are mutually complimentary. Conjoin the two qoutes with ‘therefore’, and it flows seemlessly. Gary, stick with reading charts – it’s your forte.
    Of course, science is the best means by which we understand gravity, which is demonstrable, even if not fully understood. In truth, there is an ‘infinite’ number of things which are not yet known by science. Some things are simply unknowable (i.e. gods), but this doesn’t mean they exist. Religion is a business. Its product is ‘false hope’ to gullible masses.
    Finally, I very much respect you as a trader. I am merely saying that I sense that you proselytising, albeit in a subtle way.
    Regards again,
    Glen

  • Gary Stone says:

    Response to Comment by Glen:

    What we ‘see’ is often determined by our beliefs and you may be ‘seeing’ things in this blog, based on your beliefs, that were simply not intended by me as the writer.

    Just as this applies to words so does it apply to charts. Oftentimes what people see in charts is merely a reflection of what they believe and this can have dire consequences. Which is why we need to work on achieving a neutral mindset.

    It is not the intention of this blog to get into a public debate, especially about things that have nothing to do with trading and investing.

    To this end I should have left my last response to you with just the first paragraph and not included the 2nd and 3rd para’s. My apologies to all readers.

    However, my view is that beliefs can be based on evidence and that we can change our beliefs even without using ‘evidence.’ This will be covered in next week’s blog.

    Regards
    Gary

  • glen says:

    Hi Gary,
    Beliefs are theories based on assumptions and/or hopes. Simple. Beliefs are either true or false. Beliefs remain beliefs, until they meet their burden of proof. Of course, I can believe that Holdens are better than Fords, for example, but this is more about likes and dislikes.
    Humans are a proud bunch. Our pride, however, often clouds reality. Statistically, (I love stats) humans have a propensity to adopt the beliefs of the specific culture in question. Questioning one’s beliefs is rare, indeed. In truth, we should all question our beliefs. When our beliefs have been confirmed, we then have knowledge (from the root word ‘know’). Many people believe that shares are risky, and indeed, they can be. Many property spruikers instinctively believe this maxim, as sure as Monday follows Sunday. They are wrong. Others believe reading charts is akin to reading tea leaves. They too, are wrong.
    It takes honesty to admit wrongs, hence, it is rare. Beliefs are ‘confirmed’ with evidence. Facts are based on evidence. Simple! In contrast, beliefs are based on assumptions. The assertion that, “I believe in the sun, even when it doesn’t shine” is an oxymoron. I ‘know’ the sun exists!!! End of story.
    Lastly, you need not apologise “to all readers”, as you put it. People are smart enough to tune in or out, of their own accord. This is a great opportunity for you to publicly question yourelf. Nobody knows everything (although some think they do), and we are all fallible. Yes, even me! Of course, I am abundantly aware of the advantage I have over you – anonymity. People will scrutinise what you say. I, on the other hand, can hide. Such is life. I am very happy to provide you with this opportunity. My very simple thesis is; “beliefs are not based on evidence” (Howard Coleman). Prove otherwise.

    Thanks in anticipation,
    Glen

  • Gary Stone says:

    Response to Comment by Glen:

    As I stated above I will respond in this week’s blog which I have already written. It is written with respect to trading and investing.

    Regards
    Gary

    PS. We needn’t have published any of your comments but have in full and unedited……

  • glen says:

    Hi Gary,
    I believe that trading shares is not an exact science.
    At a personal level, I believe that I set my trailing sell orders too close to the current price of stocks I hold. As a consequence, I get stopped out too often (particularly in choppy markets).
    I truly believe in keeping things simple. Do what works and repeat the process – over and over again.
    I believe in letting my profits run and cutting my losses. I believe that balance is the key to success in this business. Mind you, sometimes having tight stops works in my favour.

    All the best,
    Glen

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