Online trading, especially if you are a day trader or high frequency trader, requires trading technologies that are capable of completing mathematics thousands of times per second.
Especially in day trading operations, trading technologies can play a small or pivotal role, depending on whether the trader uses a discretionary or mechanical trading system.
So trading technologies are awesome, but what about human brain performance?
Well, the brain remains, by far, the most powerful tool available to human beings. Studies have found that our brain is capable of 1016 processes per second, which makes it faster than any high frequency trading technologies out there.
However, it does have major limitations.
Think about it. We do not need to have the best technology available to view a simple ADX indicator or a moving average. Add the fact that our memory is more often than not, useless and that sometimes our thinking is subject to cognitive biases and logical fallacies.
Not surprisingly many traders recognize that their brain is their best tool, especially when it comes to analyzing and processing ‘soft’ information – things that are so important in today’s market analysis and trading decisions. However, they also recognize that it can serve as their enemy as well, when those cognitive biases and logical fallacies kick in.
Before we go further let me quickly clarify the terminology that we are using here and explain the difference between cognitive biases and logical fallacies
A logical fallacy is an error in logical argumentation. Examples of logical fallacies are slippery slopes, homonym attacks and circular arguments. On the other hand, a cognitive bias is a genuine deficiency or limitation in our thinking — a flaw in judgment that arises from errors of memory, social attribution and miscalculations.
Logical fallacies are unquestionably a limitation, but they can be clearly identified and managed or limited. Cognitive biases are more of a gray area when it comes to identifying and recognizing them. Psychologists believe that our cognitive biases help us process information more efficiently.
Use the example of ’soft’ signals from the financial markets that we were talking about earlier; they can be recognized, elaborated upon and interpreted thanks to our cognitive biases. Technology still cannot replicate this process, no matter what neural networks and other scientists say.
So what? Well, it turns out that our brain is more powerful than any trading technology available to traders nowadays. It is wired in a way that can surely lead to mistakes, but it can also perform extremely efficiently and read “soft” signals like no trading technology can do.
We have the most powerful machine to date, it is free and still many discretionary traders are scared by it and thus, shift to mechanical systems.
To those traders I ask the following question: In a competitive environment such as financial markets, do you really want to do give up learning how to master the best ‘technological’ instrument that you own?
I know, becoming a master your mind is a lifelong project. I hope you will come to find that it is worth the effort. You could become a better trader, a better investor and a better person.
About the Author
This was a guest post by Robert Main of PropTradingFutures.com
