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MECHANICAL TRADING SYSTEMS
could be argued that for other market participants, such as market makers, the statement is neither true nor false, because their ability to capture the spread between the bid and offer, as opposed to either the trending or mean reverting nature of the markets, leads to their success. Finally, when examining the entire spectrum of market participants, all of these statements are true at the same time.
This is the nature of the markets, expressing the many faces of their ever-changing higher truth. It is a higher truth in that it transcends dualistic notions of yes, no or true, false. This is why success in the markets has so many manifestations: trending, mean reverting, long term, intermediate term, swing trading, day trading, scalping, and so on. It is also why the market sometimes rewards and sometimes punishes the same behavior.
For those thinking that this section confirms the argument of random walk theorists, let me say in the true Zen Buddhist tradition that it simultaneously does and does not. Although it is true that there are some moments of randomness within the ever-changing face of the market, such short-term randomness in no way invalidates the market’s eternally repetitive patterns of trending and mean reverting market behavior.
It is because we can never know with certainty whether the market is in its mean reverting or trending phase, nor when it is changing from one to the other, that flexibility and open-mindedness are so crucial to success as a trader. The more we can allow for any possible outcome in the markets, the easier it will be for us to quickly admit when we are wrong and thereby accept small losses, let large winners run, and adapt to whatever the market is currently showing as its reality and truth.
The market has the potential to accelerate psychological and spiritual growth because it forces us to relinquish illusions and embrace the ever-changing nature of reality. A close friend and longtime colleague, Richard Hom, goes so far as to call participation in the markets reality therapy. In many arenas of life, illusions can be nurtured and coddled indefinitely. In the markets, however, illusions of being right are punished mercilessly and relentlessly until abandoned in favor of reality.1 Many careers never force us to admit our failures or accept responsibility for errors. Although pursuit of such livelihoods may sound satisfying to the fragile ego, they are intellectual, emotional, and spiritual dead ends. We grow through our failures and admission of fallibility; we mature by embracing humility and being nonattached to the results of our actions; we succeed by shattering illusions of control and flowing with the ever-changing nature of reality.
Can a person succeed as a trader without adopting this seemingly chaotic and unsettling view of the market? Of course. Because of the market’s multidimensional nature, with discipline, determination, and patience people can adapt to one level of its truth and enjoy a certain degree of suc-
Psychology of Mechanical Trading
cess. In this way the market is similar to the doctrines of higher truth found throughout the great religious traditions.
Such religious literature is filled with phrases offering different levels of truth to various people. For example, “judge not, lest ye be judged” reveals a lesson regarding ethical law that is grasped—though, like success in the markets, not easily practiced—by the entire congregation. Yet spiritual adepts simultaneously perceive this statement both as the commonly acknowledged moral percept and a spiritual admonition against acceptance of external reality (along with one’s own nature) based on illusory surface appearances.
Although seemingly contradictory in nature, this higher truth of market behavior is an embracing of the ever-changing order within the chaos. This concept of order within the chaos, and the fact that markets are perpetually changing, is why participants find trading so stressful and why mechanical trading systems prove to be such an invaluable tool for reprogramming us to do the unnatural and uncomfortable thing. It is our ability to embrace the risk of adversity and do what is uncomfortable that leads to rewards of profit.
Mechanical trading systems work because, through repetition, they train us to embrace the unnatural until it almost becomes second nature. When a person first learned to drive, putting the car in reverse seemed counterintuitive and unnatural because the wheel turned the car in the opposite direction from when it was going forward. Yet through a combination of instruction (which included watching and listening as more adept drivers walked the person through the process) and experience gained through repetition of the task, the unnatural eventually became natural.
FLEXIBILITY IN BODY AND MIND
Many somatic practices (martial arts, Feldenkrais, Alexander technique, etc.) believe that the body reprograms the mind and vice versa. It is interesting that the practice known in India as hatha yoga, which specifically addresses the idea of spiritual union through exertion of physical force, is more commonly known throughout the “intellectually focused” West simply as yoga, or union. Union of the mind and body is an integral aspect of our growth and evolution. This is why Chapter 5 emphasized the importance of physical exercise as a method of alleviating stress and maintaining balance in both trading and life in general.