So summer time is upon us and (depending on how profitable you've been this year), your thoughts may begin to planning a summer break. If it's not been a great year for you (so far) and all you can afford is a campsite rather than canapés in the Caribbean, then you have my sympathy. Having said that some of the best holidays I've had with my kids have been budget holidays…
In particular campsites in Wales, linked to amusement parks, where the evening entertainment amounts to listening to drunken Mums and Dads belting out Robbie Williams' "Angel", or Gloria Gaynor's "I will survive" on the karaoke machine. The latter is generally sung by divorced Mums, but the one time it was sung by a bloke (as an ironic parody) it nearly brought the sweaty, Phoenix Nights, prefab nightclub down.
By the way, here's a terrific test to see how obsessed you are with trading. In the summer time, when you line up the sausages on the barbecue, tell me you don't look for patterns and lower highs or higher lows as you turn and arrange the sausages? We all do that don't we…don't we readers? Gulp..
Whilst many seek refuge in fiction novels when relaxing during a summer break I find it a terrific time to catch up on 'economic' books. When you're temporarily away from trading it can be an excellent time to catch up on books related to your profession and let's face it we're all on message constantly in this job, so a book indirectly related to your industry can provide the perfect antidote.
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Like many traders I'm drawn like a moth to an evening light to any new book that may sharpen my trading edge and add to my overall understanding of what turns our markets, The Signal and The Noise by Nate Silver is my recommend read for traders as a holiday book. Now I'm suggesting this based on the presumption that you've read the obvious; for example, Mark Douglas – Trading In The Zone, Reminiscences Of A Stock Operator, the 1923 novel by American author Edwin Lefèvre, which is the thinly disguised biography of Jesse Livermore, etc.
To go into detail with regards to Nate's book and how it relates to trading would take up to much space and in reality the points I want to make are in relation to finding the signal through the cacophony of noise we're constantly subjected to as traders on a daily basis. Nate's data collection and mining covers everything from baseball statistics to political predictions as to who would be the next USA president. But the one key aspect that keeps on recurring is probability and how he removes all the noise to concentrate on the salient points. So how does this relate to forex trading and the major points I want to make?
Nate refers to two key types of forecasters in his book, hedgehogs and foxes. Hedgehogs tend to have one big idea that they refuse to detour from, whereas foxes tend to be nimble, open minded, adaptable, and display that single characteristic we often define foxes by – cunning.
Needless to say its the foxes that make better forecasters. It's not that they're inherently flighty it's simply that their constant search for what they consider the truth, their "signal through the noise", never stops. They're constantly adapting to their environment and looking to not only thrive, but survive. But there's also another aspect to the foxes behavior that causes them to come out on top, simplicity and working probabilities.
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Rather than over complicate the process foxes quickly discard any material that is irrelevant. They have no fear of discarding what doesn't work and replacing it with what does. This is remarkably reminiscent to how successful retail forex traders succeed. Rather than be the hedgehog, glued to their confirmation biases, trading foxes throw aside and emotional connection to what hasn't worked and quickly move on to find what does. They constantly search for that signal through the noise by simplifying and distilling their trading down to a very simple construct; what works and what doesn't.
An old fox I know once told me the secret he'd discovered with regards to trading, how he'd finally cracked it after a decade or so of part time investing. Looking back, prior to reading Nate's book and being made aware of the fox and hedgehog comparison, he was obviously a fox. He had that tenacious characteristic of never giving up, this forex business was never going to beat him.
Anyhow, he'd created his own edge, found his own personal Holy Grail and it was this; he bought when price looked like it was going up and he sold when price looked as if it was going down. With strict money management and refusing to violate his overall trading plan it actually worked. He had approximately fifty percent winners, but because the gains outweighed the losses he was successful. He'd played around with all the indicator based strategies you could possibly find, had invested years to understand price action and trading patterns, had traded in his candles for Heikin-Ashi but had finally settled on a naked daily chart, using rudimentary price action whilst keeping abreast of fundamental news, and more importantly news that he understood. This fox had finally taken out all the noise and found the signal, his signal.