Information management

Much of the day in the life of an investor is spent managing information.

In trading, there is no shortage of information.

It is possible to track the opening and closing of all major world markets courtesy of cable television. 

The internet has brought the dealing desk into the home with vast information resources available via the pc.

It is possible to subscribe to magazines from all around the world.

You can even get the Wall Street Journal on line as it is delivered to homes in New York.

With property, you can get valuations, opinions, articles, magazines and even watch full TV shows about it all.

It’s a deluge!

There is a problem with all this information.

It is largely irrelevant to the professional trader.  

None of it is provided by people who actually trade for a living (this includes stockbrokers who are commission sales people).

New traders are unfortunately prone to trying to find as many sources of information as possible.

As a consequence of this, they suffer from two conditions.

The first goes under the trader’s euphemism of – paralysis by analysis.

Too much information causes the trader to literally seize up and be paralysed into inactivity.

The second problem with information overload is more insidious and probably more important.

Humans have some unique idiosyncrasies when it comes to processing information.

The first is related to our confidence in our decision-making ability.

Assume that we are trading NWS and we receive a single piece of information and we are asked to rate how confident we feel about any outcome based on the limited information we have received.

We can, for the purpose of the exercise, assign an arbitrary weighting to our confidence.  

Say that with one piece of information we are 10% confident.

If we get another piece of information our confidence may go to 20%.

This is reasonable as we have doubled the information we have received so our confidence level doubles.

However, if we get three sources of information our confidence level instead of going to 30% will suddenly rocket to 90%.

Traders become disproportionately more confident with a slight increase in information.

An additional traders’ quirk applies to how we process more and more information.

The more information we get the more we focus on the superfluous and the irrelevant.

What has been found is that traders become less accurate the more information they receive.

Whilst it is psychologically comforting to feel that your opinions are validated by the opinions of others, there is overwhelming evidence that you will not get rich listening to the advice of others.

The new trader needs to manage the information they are receiving to ensure that they are receiving information that is only pertinent to them and is not tainted by the opinions of others.

Traders need raw information, not recommendations.

Within this management of information, the technical trader needs to be addressed. 

Technical analysts may initially assume that because they use purely price to dictate their actions then they would be immune from the problems of information management faced by other traders.

Unfortunately for the technician, this is not true.

You will remember that the least important question that I posed in my introduction was what is your entry trigger? 

Entry triggers comprise far less of the trading process than people realise.

Most technicians ignore this and scour the globe looking for the one perfect indicator, many buy software packages containing what is called the ultimate indicator.