- 1999: Volume 8, No. 1 Data: Choice, Confusion & Psychology!

Choice of data can have a massive impact (positive or negative) upon our trading results-and in many more ways than many traders may be aware. Selecting the type of data feed will affect our results in critical and fundamental ways which are important to understand. We have worked with struggling traders who were actually very capable but simply not working in the market in a way which suited them best. A change in data type improved their results.

Personality and Psychology

The timescale we choose, often a reflection of our data feed (intra day, end of day, long-term), will be fundamental to how much success we experience in the market, as it throws up a host of sub issues to do with our individual personalities and psychological make up. By this I mean that we should be conscious that the markets are nothing more than a medium which can be used in hundreds of different ways to create thousands of different outcomes, each specific to our own individual (but often subconscious) needs-be they financial, emotional, intellectual or psychological.

Warren Buffet once said that he would have failed had he tried to be a floor trader. He knows his strengths and weaknesses and how he will function best in the markets. Being a long-term value buy and hold investor means the data he needs comes from company annual reports, management, market dominance, quality of earnings and so on. He operates best sitting at home in Omaha, away from the short-term (less than ten years) hustle and bustle of Wall Street, slowly turning over ideas and mechanically analyzing real businesses. This is his "data feed" and it serves his investment methods, which in turn reflects his personality.

We have found that successful market operators tend to specialize in one particular time frame, using data feeds specific to that need. It doesn't matter which style we choose, for there are many ways to win in the markets but it does matter that we understand the consequences. Floor traders, for example, have totally different mentalities and personalities from Warren Buffett and yet good ones are also, of course, still fantastically successful. They too know their personalities, their strengths and weaknesses.

They have developed an understanding psychological behavior in the same way that a poker player does. They are not using fundamental or technical analysis data, but instead feel the tone of the market using such things as the decibel level, facial expressions, body language and thousands of other subconscious, subliminal clues that they have accumulated and honed over time. This, plus the last traded price and maybe a handful of other important recent levels, is the "data" for the floor trader.

Mr. Buffett would have difficulty succeeding in such an atmosphere. Conversely, a successful floor trader would not do well with a long-term buy and hold investment strategy.

What does all this have to do with data? Everything!

Many traders approach the market either without being aware of or having fully explored their choices for what time scale-and therefore what data type and source-will suit them best. They have a preconception that they are going to trade in a certain way because they might have seen someone else do it or perhaps have read about it and simply want to copy something that seems to work. Be careful. Just because it suits someone else does not mean it will suit you. We must have a clear understanding of ourselves, our personalities, our strengths and weaknesses (often difficult to change) and choose the time frame and hence, data feed which is going to work best for each one of us (a lot easier to change).

Unfortunately, many traders are simply not conscious of this absolutely critical element and consequently they miss an essential part of self understanding that can go a long way in determining the degree of success they experience in their trading.

We have worked with several traders who were struggling and once they changed their time frame and data feed, their results improved markedly. Some worked better off the floor, on the screen, others found they were better trading very short term, rather than end of day. They were not 'bad traders', they were just not using the time frame that suited their personalities best.

The place to start therefore, before considering what data feed you will use, is what style of trading suits you and your personality and the way in which you are going to be most likely to trade (and hence, live) most successfully. You will then be better able to make more informed decisions about your data feeds.

There are inherent advantages and disadvantages for longer term investors, end of day traders and intra day traders and you must first discover and decide who you are-a Warren Buffett, a John Henry or a Tom Baldwin. Unfortunately, most traders find this out the hard way-by losing money. So, if you have only experienced one of these styles (generally just by default of not having been aware of it) may we suggest a few pointers that we use in our seminars and consulting that may help to guide you?

• Do I have the time, resolve, interest, ability, emotional constitution and supportive environment to watch the market all day (either on the floor or the screen)?
• Do I have the patience, personality and confidence to hold a winning position for many days, weeks or even months while sitting through all the backing and filling or am I going to become scared to potentially "give back" some profit before the move has fully developed and be impatient for action?

We could begin to answer this question by looking at the main advantages of short-term versus longer term trading:

• Flexibility of gearing. We can either (a) upgrade our gearing because with no overnight margin requirement our trade size to equity can be extremely high e.g. with a $20,000 account, we can trade in clips of 10 or more lots, potentially leading to returns of several hundred percent a year. Or (b) downgrade it-we can choose to take only a few ticks of risk and on just one lot this risk will be infinitesimally smaller than an overnight position of the same size.
• Flexibility of working lifestyle. Although many successful traders (and people in other jobs) tend to turn up day in and day out, using this timescale means that every day is a fresh start with plenty of opportunities. Whereas longer term traders need to look at the markets for only a few minutes each day (they could miss an opportunity if they miss just one day when they do get a signal) the intra day trader has dozens of signals and constant opportunities every day.

The main disadvantages of short-term trading are:

• It can be boring/lonely. Sitting in front of a screen all day is not a life everyone would choose. More importantly, if you are trading from home, for example, how will your relationship with your wife or partner change? What impact will it have on your behavior and hence trading?
• Whether we intend to or not, we will probably find ourselves over trading both in terms of frequency and size. It is human nature. We are far more likely to get sucked into the "excitement" of a busy market if we watch it unfold minute by minute. Similarly, we are going to be more tempted to trade out of boredom if we do not get any signals. How good is your discipline?
• The impact of commissions and the bid to offer spread on the bottom line will be far greater than on a longer term scale.
• The probability of errors (the more you trade the more you get) plus the amount of paperwork will increase.
• As it takes concentration, we will probably be restricted to just one or two markets to trade properly, maybe missing out if that market is quiet and trendless while other markets are moving better.
• Emotionally: (a) Where are you going to trade from? If at home, can you find a time and place where you will be undisturbed? Will your relationship with your wife/partner/children be impacted in any way? Is the set up entirely congruent and supportive? Or, if in an office, is this environment positive, compatible and supportive (journey to work, clothes, company of others, general atmosphere, restrictions or regulations)?
• If the first three trades of the day are losers, are we still going to have the confidence and discipline to take the fourth (no doubt profitable) signal or will we have thrown in the towel by then?
• Intra day data feeds are considerably more expensive than end of day.

Conversely, issues related to end of day trading would include the following:

• Our trading size (and hence percentage returns) may be restricted by overnight margins.

Because it takes only a short time to monitor:

• It may be compatible with a full time occupation.
• Psychologically, the less any outcome matters, the less we try and the better we tend to do! We will be better able to distance ourselves from the markets which can make trading less stressful. Because each market will take very little time to follow, we can look for opportunities in, say, up to 20 to 30 markets for opportunities. If financials are quiet, maybe energy or grains are buzzing?
• If we have a bad day, we only have to deal with it once for five minutes as the fax from the broker comes down the line. Kick the desk, walk round the garden and hopefully it's over. Contrast this with the constant emotional knocking of the intra day trader.
• End of day data feeds are considerably cheaper.

These are just a few of the issues related to data feeds that are worth consideration for traders who feel their performance is not as they might have wished.

Finally, one of the biggest problems in selecting a data source, apart from the issues above, is that with so many competitively priced special offers from vendors, traders are inclined to chop and change their systems. This a recipe for disaster! There are no Holy Grails in trading, data feeds with software promising super systems, miracle predictions and 99 percent accuracy do not exist. My advice is to try and discover which method of trading is going to suit you and your individual personality best. Find an established, reliable and helpful data vendor and stick with them. Don't chop and change and blame any trades on the system-it won't do your confidence or sanity any good !

Andy Robertson trades and also runs trading improvement seminars. Tel : 44.1342.822960 Email: Marketfocusltd@compuserve.com