The term cognitive bias has become quite popular in modern discourse. It aims to remind us that no matter how hard we try to view phenomena from an objective rational standard, there will always be actors outside of our conscious control that influence our thought. This observation can lead us to the conclusion that humans are rationalizers, not rational.
However, the observation that generated the root diagnosis of cognitive bias supersedes the domain of executive function in the brain. Our perceptual systems are just as prone to making heuristic assumptions about the world and construct the reality within those heuristics. Only after that initial distortion does our executive functions further bend and twist the final rendering of 'reality'. This is all to say that our finalized render of 'reality' can be quite bent from the raw data that was dumped into our sensory systems.
We make these heuristic assumptions to make life easier, if we were to take all inputs at the same weight, processing a single room would far exceed the brains cognitive speed.
Definition – MGI: Market Generated Information, any information that is a raw output from the market. Namely: price, time, volume, and flow. This can also include derivates of MGI so long as they are objectively defined.
The MGI Input Problem
The discretionary trader faces a data input/output problem. There are too many sources of data, with their own subspaces of context, all changing at rapid speeds. The conscious mind cannot process this data at the rate it is generated, thus, it is forced to make heuristic assumptions and generalizations. Moreover, it does so under the extremely corrosive mental state that trading can put you in regardless of the data rates.
This IO problem not only leads to the common "trader burn out", but leads to generalizations and assumptions being made all the time that if allowed to continue, will kill any objectivity you have at interpreting MGI.
MGI Perception Relative to Bias
Say a trader has a bullish bias at a given zone. Price approaches the zone from above and the trader moves from the observation stage to the stalking stage. The trader is preparing to execute. At this point the trader is now increasing the resolution of that market while sacrificing the resolution of other markets.
Given the bias, the trader now looks to execute on their trading time frame. This can involve a separate process and criteria. Lets suppose this trader is looking for absorption in the market by the buyers.
As soon as the trader entered the stalking stage of the trade, they have cued up a cognitive bias that is looking to reaffirm the market bias. This means the trader is more likely to perceive MGI as buyer absorption.
Countering the Monkey
Dammed if we do, dammed if we don't. I am still investigating good routes to address this known issue. Among the various domains of exploration:
- Mindfulness training (meditation)
- Quantifying as much as possible to be objective signals/process
- Reducing variables in a trade to be great a few rather than mediocre at many interpretations
The next time you are interpreting MGI think about your current mental state and what kinds of biases you may be predisposed to. How those biases are impacting the way you perceive and interpret MGI, and what trouble that might lead you to.
Identifying the problem is the first step to identifying the solution.