LEARN FROM YOUR MISTAKES  

TRADING IN A BLACK BOX  

  

Just finished reading “Black Box Thinking” from Matthew Syed and I just wanted to share some key takeaways and how the experience has helped me develop into a better trader. Primarily, how to embrace failure and use it as a learning experience and why ‘elite’ traders have more in common with airline pilots whilst amateurs and retail traders are more in line with medical thinking and their attitudes towards learning.   

  

LEARN FROM YOUR MISTAKES  

“The difference between science and previous ways of trying to find out truths is, in large part, that scientists are willing to test their ideas, because they don’t regard them as infallible… You have to put questions to nature and be willing to change your ideas if they don’t work”.  –Matthew Syed MS 

Markets have a habit of teaching us a lesson or two, how we process those lessons is important to our success.  At some point there is a need to embrace the ‘logic of failure’ and improve onOvernight Session More our understanding and behaviour. Markets are constantly giving you plenty of feedback through your trading statements and P/L, a feedback loop that does not lie.    MS talks about two types of feedback loops ‘closed‘ and ‘open’, and looks at two sectors in particular, the airline and the  health industry.  Historically they have chosen a differing approach to failure and learning although I think there has been a convergence/improvement in thinking of late and MS acknowledges this. I believe that the differing experiences of these industries may be useful to many traders.  

The airline industry embraces the use of an ‘open’ loop where failures are acknowledged openly and transparently, analysed, then learned from. Meanwhile the health industry has tended to use a ‘closed’ loop where mistakes can be covered up and excused away due to opaque data and the want to be protect reputation.   

A closed loop is where failure is not recognised, and errors are repeated. Weakness is misrepresented, misinterpreted and/or worse still ignored. In trading this can be easily done. Many new traders choose to turn a blind eye to their mistakes and or don’t know what their errors are and thus easily repeated. A poor trade is forgotten after a long day, but winners live strong in memory yet, no active system in place to record what is working and not.   

Traders use a mirage mechanism to hide and cover up failures, so no learning takes place, the truth hurts, and many choose to ignore and repeat the process, leading to catastrophic failure.  Generally, when confronted with evidence that challenges our strongly held beliefs our minds tend to play tricks onOvernight Session More us and allows us to make rational explanations out of thin air for our weaknesses (everyone does it especially failing traders). This behaviour was coined as Cognitive Dissonance by Leon Festinger in the 1950s.    Doctors also don’t like to fess up…. Which makes them vulnerable to their peers and ego. Does this sound familiar?  

Progress, in large part, comes from our willingness to learn from failure.  A trader who talks a good game and whose ego is bound with their predictions are most likely to reframe their mistakes and fail to learn from them.  

Airlines and pilots onOvernight Session More the other had have adopted an open loop where at a collective level there is an ethos of learning where the best lessons are from our mistakes. The more we analyse and track the ‘error signal’ (i.e.  timing, sizing, entry exits etc   and the frequency) the better we can understand their cause and effect. Then use that learning to whittle them out over time.  One other feature is that they practice practice practice! Learn onOvernight Session More the ground, not in the air. They test their ideas in a continuous reiterative structure, identifying and improving. Never accept the status quo.  Pro traders will still use a demo to back test out new strategies or run over new ideas over multiple scenarios before committing capital.   

By avoiding the acceptance of failure in the short term there is an inevitable outcome that we have an inability to improve, and we lose much bigger in the long term!  Just accept learn and bounce back.    

MS talks about the practice of breaking a problem into millions of parts and making each one of these parts better by the smallest fraction and putting it all back together.  Trading successfully is a huge problem and extremely complex forever changing.  Focus onOvernight Session More one aspect of your trading, for example trading entries. Maintain the data and use it to improve.   

Keep a journal and create an open ‘Optimisation Loop’ (journal) that you can use to repeatedly improve onOvernight Session More the status quo. You need data.  

CREATE A GROWTH CULTURE  

Regard failure as a learning process, trust in the power of process over improvisation. Difficult times come to all it is how we choose to learn and adapt. It is in a typical Darwinian fashion that dictates if we will survive and thrive or dwindle and die. When you have a deep learning process and embrace failures of all kinds as a learning opportunity your motivation and self-belief are not threatened by it.  

When we are fearful of being wrong, when the desire to protect the status quo is particularly strong, mistakes can persist in plain sight almost indefinitely. Admit to a minor flaw to avoid admitting to a much more threatening one.  Embrace your failure and use that as a powerful growth tool.  

TO SUM UP 

Up until recently they were bleeding patients to death because they thought it was good for them. Medicine has a habit of being slow to adapt or adopt new best practices, like many struggling traders who bleed to death.   

Many strong traders who I have encountered like the airline industry learn from every detail, and every error is scrutinised, a difficult landing, a change in fuel load, equipment failure and so onOvernight Session More. Most importantly it shares this information.  Sharing allows for faster growth and learning.  

“Learn from the mistakes of others. You can’t live long enough to make them all yourself.” 
― Matthew Syed 

ONE LAST THING   

“The reason is not difficult to see: if we drop out when we hit problems, progress is scuppered, no matter how talented we are. If we interpret difficulties as indictments of who we are, rather than as pathways to progress, we will run a mile from failure. Grit, then, is strongly related to the Growth Mindset; it is about the way we conceptualise success and failure.” 
― Matthew Syed 

Mental toughness and heart are essential in this game. Think of yourself like a boxer you get knocked down, but you get up again, just remember to make those knockdowns count.  Muhammad Ali was not better at boxing or stronger than George Foreman in the Rumble in the Jungle, in fact quite the opposite. He just had more heart! 

  

First written for a Convergent Trading Blog 2023