Condor Options

One reason we are constantly on the hunt for new strategies is that humans, as a species, have a really hard time functioning outside of our cognitive biases.  Biases aren’t necessarily a moral failing – they’re not a failing at all, when you really think about some of them.  Maybe confirmation bias is a tendency that was selected for among our distant ancestors because individuals with the disposition to make some rough, if somewhat unjustified inferences were better at catching prey or collecting enough berries to get through the winter or whatever.

Because it is so hard to see our own blind spots (and so easy to assume that the blind spots of others are due to their own stupidity or laziness, or both), in our social lives we use institutions to aggregate the perceptions of individuals and hopefully smooth out the average.  Sure, in any complex system or organization – be it economic, social, political, religious, whatever – you’re going to have those outlier individual nodes that shock and surprise those living along the mean.  Sometimes those individuals are benign (cf. Galileo, Rosa Parks); sometimes they aren’t (Lysenko, David Duke).

But we can obviously glean a lot more worthwhile information by attending to the views of more than just those individual outliers, and the same principle applies in trading: even if you’ve found some masterful indicator that is fantastically effective, it will by definition never be as helpful as it would be when paired with other successful tools.  Our perception of the market is never as clear as when it is shaped not by an individual but by a set of effective strategies and indicators that can shape what is, to the unaided human eye, quite a lot of meaningless noise.

So ask yourself: what sorts of events trigger trades in your account?  Are you acting based on changes in time, price, volatility, breadth, relative strength, or something else?  Do you look at studies that regularly conflict with one another, or are all of your favorite indicators always pointing the same direction?

We constantly look for and develop strategies and combinations of strategies in order to develop a picture of the market that takes in as much information as possible without itself becoming confusing.  The SQWI is our ongoing attempt to put some of those combinations into use.  Just as diversifying across assets is essential for success in managing trades, we think that diversifying across strategies is important for finding successful trades in the first place.  That doesn’t necessarily mean becoming a jack-of-all-trades; what it does mean is taking in as much information as you can learn to synthesize.  Various charting and strategy automation platforms can take the pain out of most of this process, but the key is to get comfortable with whatever range of strategies will serve as your base.

For example, you might watch the following set of daily studies on some major indexes on an ongoing basis:

• Williams %R
• 5-day RSI levels
• deviation of historical volatility from its Bollinger bands
• volume moving averages
• breadth divergences

and so on – the list is endless, and these are just some examples.  Again, the idea is to keep enough readily interpretable information in front of you that you have something for your inevitable biases to argue with.  If you’re looking for a selloff later in the week but all your strategies are flashing buy signals, well now you have to either abandon your own bias or else figure out why your otherwise reliable studies are wrong.

Admittedly, this whole approach flies in the face of that all-too-tempting quest for the One True Indicator that will capture every swing and forecast every reversal.  But ultimately, markets are just like any other social entity: collectivized and democratized decision-making power is usually more successful – and far, far less dangerous – than any messianic varieties.

[Photo, courtesy of an anonymous photographer, of Fort Tryon Park in upper Manhattan.]