Subjective vs Objective

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Subjective vs Objective

By: Becky Hayman, Traddictiv Coach

 

We’ve all heard traders who say they have a hunch about a particular stock or a certain trade “looks good” or “feels right.” It’s as if there is a kind of intuition about the markets that one can tune into. Sometimes, this approach might just work! However, this is most probably due to luck and not much else. The simple, and sometimes hard to swallow, fact of the matter is the market does not care how we feel, think or intuit. I’m sure most of us have been in a trade we were sure would work out, then something unexpected happens in the markets and it goes against us. Sometimes it is the opposite- we rule out an opportunity because it “looks bad” and see it would have worked in our favor if we’d have taken it.

One of the issues with using gut feelings as our trading strategy is the way we feel about a trade or investment can change based on human factors: hunger, tiredness, stress, emotions. It means our strategy and approach change all the time, which makes it hard to figure out what went right and why, and what went badly and why, leaving us floundering in the dark. We cannot expect a fully subjective strategy to work for us on a long term or consistent basis.

As traders, we need to think like businesspeople, risk managers and data analysts. We need to apply objective rules so that we can be consistent in our approach, increasing the probability that our results are consistent as well, removing human error as much as possible.

So, if we need to act mechanically, basing our approach on objective data, then there must be a strategy that is one-size-fits-all right? Unfortunately (or actually, fortunately) not.

Like anything in life, trading is made up of many variables, and one specific combination of variables that works in one environment may not work in another. Take a franchise business as an example – let’s use McDonalds – a huge, very successful company that exists in nearly every country on the planet. Every restaurant follows a set business model that is copied and repeated across the world, but a McDonalds restaurant in Kansas City would not have the exact same menu as a McDonalds in Beijing or London. A McDonalds located in a shopping mall may open at a different time to one that’s on the side of a highway. A McDonalds in New Delhi may charge a different amount for the same item than one in Singapore. Certain variables of the business model change because the environment does. That is something that contributes to their success all over the world.

To bring this back to the markets, what we need to understand is what works for another trader may simply not work for us. If a particular approach requires a specific indicator, asset class, market, timeframe, entry rules, risk management, to be used at a particular time of day that requires a certain capital level, etc. that approach may work perfectly for one trader, but their environment is different to another trader. Someone else who has a different level of capital their trading account, different risk tolerance, different time availability, lives in a different country with different brokers and different leverage rules will probably find it difficult to copy that initial strategy exactly. They simply might not have the environment that allows for this specific combination of variables. So, we cannot expect a completely objective or 100 percent “copy and paste” trading strategy to work for us either, bearing in mind the change in environment per trader.

If we cannot expect a fully subjective approach to work consistently, and it would be nearly impossible to enact a fully objective approach by “copy and paste,” what do we do?

We need to be subjective about our environment but objective about our methodology. The great thing is, there are many ways to trade profitably. This can be frustrating, especially if you’re a new trader starting to find your feet. But it is also brilliant – it is unlikely there is not a profitable combination of variables that will fit YOUR environment (your account size, psychology, time availability, etc.).

What we need to do is first understand certain key components that will be part of our subjective environment. These can include:

  • Time of day we’re available to trade (not just to analyse markets but for trade management as well)
  • Our capital size and comfort with risk percentage
  • Psychological traits that could impact us as traders (often underrated but possibly the biggest hurdle most traders face)

By understanding these things (and more), we can start to understand which elements of our trading approach will be subject to our environment and therefore choose the objective methodology that suits it.

For example, if someone else has a brilliant approach to an asset class requiring $20,000 and we only have $5,000, then we know we simply cannot just copy and paste that strategy. If someone else has an approach that requires trading during the US market open but we’re at work at that time, then we know that we cannot copy this either. *In our Trading Plan class, we go into the process of how to figure these things out.

Once we know our environment, what markets we are going to trade and how often, which timeframes to use and how to manage our risk, we can then begin with an objective approach to our methodology. The use of technology helps with this as it takes out a lot of human error or subjectivity. Technology that can tell us whether to buy or sell and if so at what price is particularly helpful. We simply apply the technology and methodology to the markets and time frames that suit us and apply our own risk management rules around it. Decisions such as whether to buy or sell and areas for entry are objective, but we’ve changed some variables to match our subjective trading profile.

Ultimately, like many things in life, what we want is the “sweet spot” – the balance between human elements and mechanical approaches, being able to be flexible but also consistent. Being able to reflect on the elements of our trading strategy that fit us better as individual human beings and then combining it with a methodology that is as objective as possible (ideally using technology for a great chunk of it) is the sweet spot.

 

 

Disclaimer:  The author is not a financial advisor and the following should not be taken as financial advice.  This is by no means a complete discussion of the pros and cons of trading and/or investing. Please consult your own qualified advisors to determine what is appropriate and best suited to your specific investment objectives and risk tolerance.

2020-06-04T15:49:24-04:00
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