Importance of a system.

I was totally overwhelmed by a wonderful response I received for My #EDECMA presentation organized by DefineEdge.

I received numerous emails, requesting to explain the most provocative slide of them all.

So Lets start from the start.

How is a Decision made. In our domain as a trader we need to make decisions everyday. Few important ones that matter include When do you decide to buy/sell/hold/pyramid/partial book a position. Your entire PnL is dependent on these decisions. Each one would have a serious impact on outcome.

If any of these decisions are not Pre-defined, you are basically allowing the subconscious mind to take that decision for you and last I checked, not 01 in a million is in control of that.

Consider your conscious mind as a tip of an Iceberg, the visible part. The remaining 90% of it is under water.

The actual day to day decision is taken by that mammoth mass under water. Conscious mind simply takes ownership of that decision a few seconds after its made.

We spend our entire life living in this illusion that we are in control and making decisions out of free will

A valid (not so valid as we will see) argument here is that even sub conscious mind is US only and therefore Free will is INTACT.

To answer this question, we need to understand how our subconscious mind make decisions. Consider it as a file cabinet organized in terms of importance (IMPACT) A whole lot of inputs go into its making. Genes, upbringing, experiences, conditioning, tendencies, traumas, triumphs etc.

Lets add a few examples of how 01 event in life changes the entire spectrum of your destiny or how you think.

Consider an Investor who has witnessed 1929 depression and the poverty his family suffered because of that. Contrast that with a guy who only saw the 1990s dot com bubble. Considering all other factors (intelligence, EQ, IQ, accounting skills etc) as equal, the investment style of both would be totally different. (Your decision in this case is derived out of your experience)

Lets look at another example. You guys must have seen the movie MoneyBall. (If you haven't, please do)

Billy Beane was an excellent Prospect with a bright future ahead of him. The movie beautifully portrays the interesting equation between Success and confidence. Which one comes first, you don’t know and how each one feeds on other is a fascinating spectacle.

No matter how talented you are, your first few flops(losses) can scar you for life and that loss of confidence can be GAMEOVER.

Similarly on the other side of that same coin, below average joe can become a different person riding on the confidence of his success.

Again your decisions were a factor of outcome. Outcome influencing how you think and therefore act.

There are numerous examples on display. We need not waste ink here. Point is, your subconscious mind is storing images, stories, narratives that it deems impactful and they are playing a HUGE role in your day to day decisions.

Lets say you were bullied in your childhood, you think because its been so many years and you have moved on. You’d be wrong. That KNOT will keep playing out again and again until you address it.

Lets say a girl was molested in her younger days. Do you think that will NOT play out in her relationships just because she has decided to ”forget” about it.

Ed seykota beautifully said,

Feelings you are Not willing to experience are your Actual trading System.

In the world of trading, without a defined system in place, you are most likely to either Chicken out and not pull the trigger or PANIC and take too many trades.

Actually, its not even about systematic Vs discretionary debate. Because your Sub-conscious if its not in sync with your conscious mind, will NOT allow you to either create a system, or trade it.