Enhancing Trader Performance: Pattern-Seeking Addiction

David BlairDavid Blair, General Comments, Trading Psychology1 Comment

*****David Blair, The Crosshairs Trader, is a blogger/trader/educator who does a wonderful job of sharing research on elite performance and how it relates to trading. Below is his latest post for the SMB trading community.***** — Editor’s Note

We stock traders are notorious pattern seekers, “finding” everything from head and shoulders to triangles to cups with handles in price charts. We come by it honestly as we are born with a pattern-seeking instinct to help us make sense of the world around us. If we do so outside the charts is it not expected that we will do so inside? There is nothing inherently wrong with pattern seeking, as it is at the heart of much technical analysis, whether it is in the patterns mentioned above or in trends or in fundamental analysis where past performance is a pattern for future out performance (a continuation of the previous pattern). Where we run amok is when we allow the patterns to become more meaningful than the actual evidence. Just like rules are made to be broken, patterns are made to fail and, if we are not careful, can fool us into thinking we are seeing something that is little more than a coincidence.

The following articles can better help us understand and appreciate our pattern-seeking tendencies thereby enhancing our ability to overcome any adverse addictions we may have toward them.

“Our brains are wired to force us into forecasting; it is a biological imperative. In fact, humans are born with what I’ve come to call ‘the prediction addiction.’” (CNN MONEY)

“Presented with random, unstructured patterns, our brains will often force them into the molds and templates we already have.” (Adam H. Grimes)

“We have no error-detection governor to modulate the pattern-recognition engine.” (Scientific American)

“Perhaps the greatest strength and weakness of the human brain is its hard-wired tendency for pattern-recognition.” (The Financial Philosopher)

“Our brains seek patterns in coincidences.” (Bernard D. Beitman, MD)

“We as investors and traders need to be constantly on alert to situations where our brains can fool us into thinking we can foresee the future.” (Abnormal Returns)

“We are primed to look for certain data to fit our theories.” (Michael Shermer’s video on Cognitive Bias and Pattern Seeking)

David Blair


Related blog posts:
The Money Trade
Technical Analysis: Four Basic Principles

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One Comment on “Enhancing Trader Performance: Pattern-Seeking Addiction”

  1. David/Bella,

    This has and continues to be a very important topic for my trading.

    Some thoughts:

    The challenges I have are not so much that my mind searches for patterns. Technical traders by definition trade patterns. Where my challenges lie is in making *objective* decisions during live trading hours when one’s decision making process is highly influenced by emotional/psychological factors.

    I think everyone who has been trading a while is familiar with looking at a trade in after hours review and writes in their log/journal, “what was I thinking?”

    It is easy to be objective when the tape is stopped. It is a life long challenge to achieve a high degree of objectivity when the tape is running.

    Here’s what I have worked on extensively in the last year:

    1. Psychological coaching (Don’t leave home without it!) Andrew Menaker and Denise Shull are both highly recommended in this regard. IMO, one needs to spend as much time understanding oneself (maybe more) than time spent with charts. To make significant breakthroughs in trading I had to understand my own emotional makeup (in detail) and the influence of that on myself under the stress of trading. Know that the emotional challenges don’t go away…but understanding them helps immeasurably in one’s ability to analyze charts objectively and to do the right things when under the stress of a live tape with money on the line.

    2. Focus on process rather than individual trade outcomes. I can’t tell you how important this one is for me. Since this thread is about pattern recognition, I found it crucially important to develop a *set* of analysis processes that I (1) continually refine and (2) follow objectively during trading hours. The analysis processes are a set of simple steps I use to analyze patterns during the trading day. Note these steps are meaningful to me in that they (1) match my own psychological makeup and (2) are aligned with my edge/playbook. I think these steps are likely unique to every trader and must be discovered by them through a lot of introspection and hard work.

    3. I have to be thinking several steps ahead of price to trade well. All of us that have been trading for a while know that in price discovery anything can (and will) happen. I have found that for my own trading when I’m trading best, I will work with the charts and *see* one or more potential pattern outcomes. I then create a set of IF/THEN entries in my logs such that if price *develops* a pattern that I have been looking at for a while, I’m sitting there waiting for it and am well prepared to act on that *pattern*. Conversely I almost invariably trade poorly when I trade based on an immediate decision on a chart pattern, IOW *knee-jerk*, FOMO trading.

    Am interested to hear how other traders think about these things (or if they even are).


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