May

11

Here are some elements of chess thinking that may be relevant to trading:

a) In considering patterns on the chessboard one does not select a single element (e.g. a doubled pawn) and then assess a position purely on the basis of previous examples (e.g. outcomes after x moves since the doubled pawn arose). It may indeed be the fulcrum for one's considerations, but one should also be on the lookout for patterns that might arise as a consequence.

At this point we start to get beyond static testing of patterns into the realm of simulation. Now I'm aware that there may be some advanced simulation programs around, but on the basis of what I've seen of chess programs they're going to be way too primitive. For day trading at least it needs a flexible organic mind to look ahead, synthesize patterns, adjust one's perspective along the way and work within available margin.

b) Even more important than considering one's own happy outcomes is to bear in mind what the opponent would like to do to us. Many beginners make the mistake of only considering ways the game will be won for them without bearing in mind the myriad ways in which they can lose. As a result they can play very badly in adversity, or build their positions so that they fall apart when things go wrong.

I have an example of this second point in that I've seen it mentioned numerous times that everyone is afraid of another decline like Feb 27th. But not once have I seen it mentioned that people may also be afraid of missing the kind of rally we saw out of last year's panic. This seems like an equally viable proposition and yet it hasn't been mentioned. Why not? Because it would raise the possibility that bulls can act irrationally.

Now we all know that stocks tend to go up, but this does not immunize bulls against irrational behaviour. A bull can go every bit as bankrupt as a bear if he's highly leveraged, operating on a short time frame and doesn't have some very fancy footwork. And he can turn round and say he was 'right' when the market goes back to new highs, but this is just another form of denial if meanwhile he went broke or didn't have the margin to exploit it.


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