In yesterday’s blog on the S&P, I set out my conclusions but not my thought processes. In coming to the conclusions, I used a process involving:

  1. Scenario Creation
  2. Decision Tree Analysis and
  3. Visualization.

The essential elements of Scenario Creation are similar to the processes used in Scenario Planning. (See http://en.wikipedia.org/wiki/Scenario_planning, item 6 ‘Scenario Planning). Once I have identified the 2 or 3 most critical scenarios, I use Decision Tree Analysis ( see http://www.mindtools.com/dectree.html) to determine the strategy and tactics to employ. I then use visualization and mental rehearsal before placing the trade. I use the same process to manage trades.

In this blog, I want to consider the benefits of visualization and mental rehearsal. These techniques are used by many top traders but if my experience with retail traders is any guide, few retail traders use them.

Neurology has shown that by practicing visualization and mental rehearsal before an event, sportsmen create neural connections and pathways that assist in excellent performance. What is true for sportsmen is true for the trader. By creating mental pictures of the execution of our trading plan, we create the connections that make it easier to maintain discipline.

In Volume 2 Number 9 of Trend Dynamics, Joseph Hart quotes a number of top traders who use the process:

  • Linda Bradford Raschke (http://www.lbrgroup.com/) says: I build a “little road map in my head. It teaches me to anticipate. Anytime the market is deviating from my road map, I am out of there because the market is not doing what I expect it to be doing.”
  • Marty Schwartz (http://www.traderknowledge.com/traders/martin-buzzy-schwartz/): “You see certain things by poring through your chart books…I’m looking for a mosaic in the stock market.
  • Paul TudorJones (http://en.wikipedia.org/wiki/Paul_Tudor_Jones): “..you start visualizing in advance the scripts the markets are following….You’ve got to have a game plan…you’ve got to anticipate them (i.e. anticipate adverse moves). You’ve got …not (to be) reactive but proactive.”
  • Bruce Kovnor (http://chinese-school.netfirms.com/abacus-hedge-funds-Bruce-Kovner.html): “One of the jobs of a good trader is to imagine alternative scenarios. ….Inevitably, most of the pictures will turn out to be wrong ….But then, ….you will find one (where) nine out of 10 elements click.”

You’ll notice that each trader has a slightly different approach - but what is common is the creation of pictures as an anticipation strategy and visualization of the response. Now these are some of the top traders in the world. If they are doing something that works, shouldn’t you at least give it a try?

Related Posts