BarroMetrics Views: Pattern and Reasons

In the early years, as I struggled to make my mark as a trader, I made certain choices that landed me in front of Dr George Lianos, a consultant psychiatrist-psychotherapist in private practice in Sydney, Australia. I learned much in my ten or so years with George. One idea I found particularly useful:

If you find you are creating unwanted results, focus on the pattern of behaviour, not on the reasons for each incident. What is important is the pattern, not the reasons, even though, taken individually, the reasons may appear valid.

As an instructor and now as someone seeking to establish a successful prop house, the refrain is particularly relevant.  As an example, let me introduce you to my nephew, Kane. I am very proud of Kane - I could not ask for a better student of the markets. So, choosing him for an example is particularly apt.

Kane has taken to heart, my admonition to place a stop with every entry. Recently, he placed a stop at a level that exceeded his risk management rules. At the time of placement, he could not conceive that the stop would be hit. Unfortunately, it was a news event night and the stop was hit and then the market moved his way.

Last night, he mentioned that after that loss, he had trades were he would be stopped out only to see the market move in the direction of the trade. When we analysed the losses we found that his stops were now less than the ATR of the timeframe he was trading. To me this means that his stops were too close. So for last night’s trade, we worked out an entry and stop. I went to bed because from the early volume. I formed the view we’d see a low range day.

Kane took his long; but then decided that to move his stop up (and withing the timeframe’s ATR). The result? He was again stopped out, only for the trade then move to his profit exit.

The episode has some awesome lessons:

• Placing an initial stop within the timeframe’s ATR means you are more than likely see the stop hit on a random basis.
• ‘Knowing’ why  a pattern is happening does not of itself mean you will change the behaviour. In this context, it is the behaviour that counts, not the ‘why’.
• If you choose to continue the behaviour, then you will keep getting the same results. So, your choice is: “Do you want results, or do you want reasons”(Vince Lombardi).

You see, just knowing why we do something is not enough. We need to change the doing that brings about the unwanted results - only in this way will we find actions that bring about the outcomes we want.

Refer this blog post to a friend or colleague…