Dao of Trading

[Simon Gordon]

I found the 80/20 principal partially chimed with my strategy of focusing on holding one stock at a time.

I read the book by Richard Koch which is an excellent introduction to this theory:

"If the typical pattern is for 80 per cent of results to come from 20 per cent of inputs, it is necessarily typical too that 80 per cent, the great majority, of inputs are having a marginal - 20 per cent - impact."

 

[martyschwartz]

I think S. Becker's translation is continued to be a little better... Here the "straw dog" (a sacrificial animal image) is translated as sacrificial objects.


Chapter 5. Emptiness and the Center

"Nature is not humane.
It treats all things like sacrificial objects.
The wise are not humane.
They regard people like sacrificial objects.

How the universe is like a bellows!
While empty, it is never exhausted.
The more it is worked, the more it produces.
Much talk brings exhaustion.
It is better to keep to the center."

The wise has no agenda and therefore does not take side just like the heaven and earth. Precisely because the heaven and earth are just empty space, everything flourish within. Words and concepts always take size and shape and therefore bring upon their own exhaustion. It is better to not take side.

As soon as we expect and fixate, then we lay seed for positive and negative outcomes... pleasure and pain. Not being prepare for the better or the worse make us over-react. I don't think it is practical or even healthy to strive for emotion-less trading. Buddha is not a cold emotion-less being and that is not the final goal. It is our reactions to outcomes due to confusion (fixating things to be one way or another) and losing perspective - that need to be managed.

As a system trader, basically I view myself as the computer operator and the janitor. During the day while I am babysitting my system, I sometimes find myself fixating on an individual trade like some kind of horse race with my money in it. Only when I remember this is gonna take years off my life and all the works I put in and stuff I believe in, am I able to keep things in proper perspective. I think I have to manage my own expectation as best I can and then deal with whatever emotions arise in an honest manner rather than ignoring or suppressing the feelings. I try not to dwell so much on the content of these feelings as advised by the Buddhist teachings but in general kinda sizing them up for what they are worth...

 

[martyschwartz]

Tom Baldwin interviewed by Jack Schwager in Market Wizards:

"The way I trade is: Live by the sword, die by the sword."

 

[Simon Gordon]

From The Way of the Warrior Trader:

To be able to take effective action on any battle plan, whether it be real combat or market trading, your stances or positions must be yours and yours alone, and based exclusively on your own analysis and observations. Otherwise you will never be able to truly live or die by them.

A firm attitudinal stance or postion is something you absolutely beleive in - not something you might believe.

 

[Simon Gordon]

Hi Marty

I am wondering how the Dao impacts you when you trade.

Simon

 

[martyschwartz]

Hi Marty

I am wondering how the Dao impacts you when you trade.

Simon

Dao and the questionaire below have turned me from a discretionary trader into a system trader - 110% automated because I decided to leverage my strength (I was a programmer in my previous life) and avoid my weaknesses. System trading happens to fit my personality but it has its own set of challenges and I am still learning.

But in general, I am a bit more clear on what's needed to be done above the individual trade level.

http://www.gamblersanonymous.org/20questions.html

THE GAMBLERS ANONYMOUS TWENTY QUESTIONS

1) Did you ever lose time from work or school due to gambling?
2) Has gambling ever made your home life unhappy?
3) Did gambling affect your reputation?
4) Have you ever felt remorse after gambling?
5) Did you ever gamble to get money with which to pay debts or otherwise solve financial difficulties?
6) Did gambling cause a decrease in your ambition or efficiency?
7) After losing did you feel you must return as soon as possible and win back your losses?
8) After a win did you have a strong urge to return and win more?
9) Did you often gamble until your last dollar was gone?
10) Did you ever borrow to finance your gambling?
11) Have you ever sold anything to finance gambling?
12) Were you reluctant to use "gambling money" for normal expenditures?
13) Did gambling make you careless of the welfare of yourself or your family?
14) Did you ever gamble longer than you had planned?
15) Have you ever gambled to escape worry or trouble?
16) Have you ever committed, or considered committing, an illegal act to finance gambling?
17) Did gambling cause you to have difficulty in sleeping?
18) Do arguments, disappointments or frustrations create within you an urge to gamble?
19) Did you ever have an urge to celebrate any good fortune by a few hours of gambling?
20) Have you ever considered self destruction or suicide as a result of your gambling?

Most compulsive gamblers will answer yes to at least seven of these questions.

 

[ZDO]

If you answered YES to 7 or more of those questions, then
how will system gambling vs discretionary gambling change
anything?

ie

Are you a compulsive trader? Do you really think that if you are
a compulsive trader that switching to ‘mechanical’ will fix things?

ie
THE TRADERS ANONYMOUS TWENTY QUESTIONS

1) Did you ever lose time from work or school due to trading?
2) Has trading ever made your home life unhappy?
3) Did trading affect your reputation?
4) Have you ever felt remorse after trading?
5) Did you ever trade to get money with which to pay debts or otherwise solve financial difficulties?
6) Did trading cause a decrease in your ambition or efficiency?
7) After losing did you feel you must return as soon as possible and win back your losses?
8) After a win did you have a strong urge to return and win more?
9) Did you often trade until your last dollar was gone?
10) Did you ever borrow to finance your trading?
11) Have you ever sold anything to finance trading?
12) Were you reluctant to use "trading money" for normal expenditures?
13) Did trading make you careless of the welfare of yourself or your family?
14) Did you ever trade longer than you had planned?
15) Have you ever traded to escape worry or trouble?
16) Have you ever committed, or considered committing, an illegal act to finance trading?
17) Did trading cause you to have difficulty in sleeping?
18) Do arguments, disappointments or frustrations create within you an urge to trade?
19) Did you ever have an urge to celebrate any good fortune by a few hours of trading?
20) Have you ever considered self destruction or suicide as a result of your trading?

Most compulsive traders will answer yes to at least seven of these questions.

Marty, thanks for your posts.
I used the word 'you' a lot up there, but it's not a slam.
Lot's of us 'you's' need to look at this
AND you may not actually be a compulsive trader!
AND “Honesty is the key” Find out for sure.
What is a compulsive trader anyway?

zdo

 

[martyschwartz]

Hi zdo,

1) I don't think you can really draw the line and say seven Yes's make you a compulsive gambler. But it's their guidline.
2) I use the questionaire as a tool to question myself from time to time because both time and energy are LIMITED in a human being. I do not want to waste them too much fighting myself.
3) Never did go to the GA meeting. But I think the GA people would still consider me a compulsive gambler even though I would say I have a system... They don't care!

The biological causes of the compulsiveness (in gambling) are the frequent emotional up and down episodes that stimulate the brain chemical change and lock it in for wanting more. How can I minimize these fluctuations between pleasure and pain? I figure my purpose here is not spiritual enlightenment but to make money. I don't need to meditate in the mountains and uproot the real problem - ego fixation. I just need to AVOID the chemical changes in the brain often enough.

My conclusion is I want to focus my energy on the levels above the individual trades so I developed my trading system according to the way I traded discretionarily to take care of the details on the individual trade level.

The reason I go for system trading is a personal choice. There is a lot of pitfalls in system trading and development and I am glad I have some programming years behind me. Even at this point, I am not sure how big the backtest gap is when compare to reality but it does give me some idea about what I am getting into and HOW TO MANAGE the situation given the numbers.

But so far... I am happy with my efforts. For example, I did something really stupid yesterday. I took my son to his pediatrician. I decided to let my strategy run unattended (I know I shouldn't have done it even though I put in a few measures to take care of sutff such as disabling the screensaver in order to run a script to answer popup dialogs etc). When I come back, I have a reasonable profit (as much as I would have trading discretionarily all day worrying over what's happening on the screen). Is it always this good? F@ck no.... just the day before that I found out I had been trading with a wrong setting for running my strategy and in addition there was a bug in my code hidden for months. Both problems hit at the same time and wiped out my week's profit and then some which I made some back yesterday. The week still ended up with a slight profit.

I view system as a tool. Just like cooking rice, you can cook rice by using a traditional pot on a stove and watch over it so the rice won't get burned or you can use a Japanese made electric fuzzy logic rice cooker. At the end of the day, I want my Japanese rice cooker to reduce the emotional up and down somewhat so that the chemicals in my brain won't get fried as hard... hopefully more consistent rice.

I also can see how people can get into real troubles with system trading (including myself). It is just as risky in other ways:

1) The backtest might be invalid due to problem such as not enough data (overfitting the data), limitations of the backtesting software etc.
2) The system code is not working the way you think it is working.
3) The system can blow up.

But I absolutely agree that you can't just solve all the dinner problems by getting a Japanese rice cooker.

 

[martyschwartz]

Chapter 6. The Mystical Female

"The spirit of the valley never dies.
It is called the mystical female.
The door of the mystical female
is the root of heaven and earth.
It seems to be continuously within us.
Use it, and it will never fail."

This chapter is particularly cryptic. I don't really understand it. It could be hinting at some esoteric meaning about the relationship between internal self and the external cosmology. All I can think of is that the "deathlessness" of the valley spirit is being re-labeled as the mystical female and the "door" of that is being equate to the root of heaven and earth. As one concept is being built on top of another one... Nevertheless it is the deathless of our minds... being the ground for the heaven and earth. :?:

The heaven and earth are all mind... Yet the mind is being described as a continuum that "seems almost existed" in the literal text. In the same way, each trade is a series of actions we designated as winner or loser while all along we are just fixating and shaping our mental energies as this or that. Be aware of the fact that mental fixations often lead to cycle of pleasure and pain. Doing away the fixations might require spiritual integrity and insight difficult to access in a confused state. However at least we should avoid over-invest our emotions into the fixation... knowing it is always a trap when things start falling apart.

 

[RUDEBOY]

Detachment! Sounds contradictory. Psychological detachment from the market(s) is the only true way of being totally in focus with the market(s). Its hard to achieve if not unachieveable.

 

[martyschwartz]

Detachment! Sounds contradictory. Psychological detachment from the market(s) is the only true way of being totally in focus with the market(s). Its hard to achieve if not unachieveable.

Yes, detachment is the answer but from what I understand, it would require some significant spiritual breakthrough to achieve "true" detachment (not fabricated). If one has that kind of spiritual insight, he would probably "choose" NOT to trade and continue to work on deepening that insight and then after years of concentrated efforts, he would return to trading to test his attainment because at that point the emotion uprising will only increase his realization instead of confusing him.
I think the detachment we mere mortals described are fabricated (not that it is not useful) and most likely just pulling the mind from one side to another. Is it all lost? I think not. We know how we increase our attachment by setting trap before the outcome, so maybe instead of turning it off (which is entirely something else), we can leave the volume low.

 

[Simon Gordon]

Detachment is pretty straightforward.

I think McCall exlains the process best:

True warriorship is, above all else, the Way of self-discipline and self-control. In order to prevail over the opponent or situation that comes leaping at you, you must first be centred in body, mind and spirit! Remaining centred in the face of hardship, risk, or fear is the ultimate objective and outcome of martial training.

...unification of body, mind, and spirit - is the warrior's one true Way and means of accomplishing it!

In the marketplace there are numerous training methods available:

Karate

Kung Fu

Tai Chi

Qigong

Meditation

Yoga

Psychotherapy

Fencing

Mind altering drugs

...the list goes on...

 

[Swang]

Detachment in the spiritual sense requires an identification with ones true self (sometimes called the higher self) it is the detached observance of the personality (vehicle) from a higher plane, unencumbered by maya (illusion)
In trading this would equate to those near mystical moments of being in the flow of the market

 

[Simon Gordon]

Off-topic but worth a read:

http://www.nationalreview.com/rose/rose200504110816.asp

 

[martyschwartz]

I happen to come across this excerpt from William Eckhardt interviewed by Jack Schwager in "The New Market Wizards" on page 115. He is talking about the thing I am trying to do in my own trading. I don't want to take it out of context so I include the bulk of it:

Jack: Your comments basically seem to imply that chart reading is just laden with pitfalls and unfounded assumptions.

Bill: Yes it is. There may be people out there who can do it, but I certainly can't. Every pattern recognition chart trader I know makes the trades he really likes larger than the trades he doesn't like as much. In general that's not a good idea. You shouldn't be investing yourself in the individual trades at all. And it's certainly wrong to invest yourself more in some trades than others. Also, if you think you're creating the profitable situation by having an eye for charts, it's very difficult not to feel excessively responsible if the trade doesn't work.

Jack: Which, I assume is bad.

Bill: Yes it's very destabilizing.

Jack: Whereas if you have a mechanical system, that's not a problem.

Bill: That's right. Your job is to follow the system. If the system does something that results in losses, that's just an expected part of the system. Your judgement might be on the line over the entire performance of your system, but there's no sense in which your judgement is on the line on any single trade.​

I think this is well said not only for system trading. Overinvest oneself on the individual trade level is a trap.

 

[martyschwartz]

Detachment in the spiritual sense requires an identification with ones true self (sometimes called the higher self) it is the detached observance of the personality (vehicle) from a higher plane, unencumbered by maya (illusion)
In trading this would equate to those near mystical moments of being in the flow of the market

There is nothing mystical about being in the flow. It is closer to our innate ordinary natural state. It is our confused state and contrivance that are unnatural and out-of-ordinary.

 

[Swang]

There is nothing mystical about being in the flow. It is closer to our innate ordinary natural state. It is our confused state and contrivance that are unnatural and out-of-ordinary.

There is naught that is not mystical.... the lips of wisdom are sealed except to the ears of understanding

 

[martyschwartz]

There is naught that is not mystical.... the lips of wisdom are sealed except to the ears of understanding

Sorry, I am just repeating like a parrot what I heard as a Buddhist student. Buddhahood is about coming home... recognizing the ordinary natural state which has all the perfect innate qualities... no increasing... no decreasing. The so-called "rainbow" meditation, mystic state and visit to the heaven have no bearing in solving real problems. In fact, they add to our attachments... :?:

 

[martyschwartz]

Hi Simon,

I am getting a little old and rusty so I do a little meditation and Qigong to avoid the hospital. But mind-altering drugs? I hope you are just kidding. You know it is strictly forbidden in the Buddhist teachings... It hurts the body in a big way and create problems for practicing Vajrayana Buddhism.

 

[Swang]

Sorry, I am just repeating like a parrot what I heard as a Buddhist student. Buddhahood is about coming home... recognizing the ordinary natural state which has all the perfect innate qualities... no increasing... no decreasing. The so-called "rainbow" meditation, mystic state and visit to the heaven have no bearing in solving real problems. In fact, they add to our attachments... :?:

The eastern system is not conducive to the western lifestyle, the hurly burly of western life let alone trading does not offer many opportunities to wander the desert or meditate in a cave or under a tree for 20 years. I am also not enamoured with the eastern system as it has been transplanted in the west, a good example of this is the notion of karma as a balancing of good and bad deeds when in fact karma is nothing more than learning lessons, yes sometimes those lessons involve the very act we displayed ignorance of, but the bottom line is learning the lesson, not retribution