Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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Don't let the sun go down on me
Although I search myself, it's always someone else I see
I'd just allow a fragment of your life to wander free
But losing everything is like the sun going down on me
From: Don't Let The Sun Go Down on Me ( Elton John and Bernie Taupin)
The words and images coming out of New Orleans and the rest of the devastated Gulf Coast make it clear that Hurricane Katrina will rank among this nation's worst natural disasters. With estimates that thousands may have died, Katrina could be the worst U.S. disaster since the San Francisco earthquake killed up to 6,000 people in 1906. It could approach the nation's worst disaster - the 1900 hurricane that wiped out Galveston, Texas, killing 6,000 to 12,000 people.
We at www.trending123.com extend our collective healing energies and prayers to all those who are suffering and all those who are helping.Please consider donating some or all of your trading profits on Tuesday to the hurricane relief effort.
What can we learn about trading from this natural disaster and its consequences?
1. If something can do wrong, it will.
2. There is risk. There is always risk, but we don't know where, how or what.
3. Expect nothing and be prepared for everything.
4. Someone always knows more than you do.
5. When your position is going underwater, cut losses and run. Trading on hope does not work.
6. Strive always to reach for higher ground, both in trading and in life.
7. Do not expect anyone to rescue you...take care of yourself.
8. When in doubt, either get out or stay out.
9. If you are having challenges, focus on the solution, not the problem.
10. Panic is not rewarded.
I tired to count the number of times this weekend that the word "chaos" was used in connection with the incessant media coverage (which, by the way, drives repeatedly to the core of the rat brain) of the disaster from Katrina, and lost count at 72.
As a trader, you must learn about chaos, what it is and how to deal with it. Why? Because, in the opinion of many, the markets are non-linear, dynamic and chaotic. Many of the legendary trend traders have focused heavily on modeling around chaos theory. To them and others, the markets are non-linear, highly random, but with a trend. They work with strong mathematical and statistical models involving skew, kurtosis and tails to exploit the chaotic nature of the markets. When they win, they win big. They can also lose big. There is risk in chaos, just as there is reward.
Chaos theory requires non-linear thinking, and eludes many who elect to live and think in a linear world. Fractals and fractal analysis play an important role in chaos theory. The work of the 80 plus year old mathematician, Benoit Mandelbrot, ( of Mandelbrot Fractal fame) has been applied to the financial markets in his controversial book entitled "The (Mis) Behavior of Markets", wherein he uses fractals to correlate commodity prices, income distribution, and the functioning of the cardiovascular system.
Interestingly, particularly in light of the present catastrophe bought on by weather, much work on chaos theory was done by Edward Lorenz, a meteorologist. His work is beyond the scope of this article, but the end result has come to be known as the "butterfly effect" :
The flapping of a single butterfly's wing today produces a tiny change in the state of the atmosphere. Over a period of time, what the atmosphere actually does diverges from what it should have done. So, in a month's time, a tornado that would have devastated the Indonesian coast doesn't happen. Or maybe one that wasn't going to happen does ( excerpted from : Does God Play Dice? The Mathematics of Chaos by Ian Stewart)
For those of you who wish to go further into this, here is a link to start: http://www.cmp.caltech.edu/~mcc/chaos_new/Lorenz.html
The highly controversial and provocative work of the mathematician and exotic options trader Nassim Nicholas Taleb ( "Fooled by Randomness"), revolves, in part, around the theory of The Black Swan. His basic thesis is that, since we have not ever seen a black swan, we think that all swans are white. Black swans are so-called "outliers," or events that do not follow predictable rules. Taleb posits that we get guidance for the future based on our experience from the past, somewhat like a driver looking into a rear view mirror who runs off the road or into a brick wall.
One of his basic theses is that we don't learn that we don't learn, and that events that really matter do not follow any predictable rules.
So- as traders and in life, how do we make decisions in a world where we never know what we don't know?
I don't know. Perhaps you do?
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