Structure in the Storm: Mastering the Market Chaos
Proven techniques to navigate the Market chaos effectively
“Everything was moving too fast, I started listening to others, I made mistakes and lost on everything in the end.”… Sound familiar?
Most intermediate traders and investors feel like they have all the knowledge they need in order to succeed in the markets, however in the end, mistakes are made which sets them back to square one.
This post will focus on the work I undertook with a personal coach and through years of reflection in order to navigate the rough waters and chaos that the markets and attached composition present us with.
Taming the Untamable: Harnessing the Power of Chaos
To those presented with chaos, the reaction automatically becomes fight or flight, however there is a third option. Not moving, creating structure and approaching the problem with an effective tactic.
Chaos can not be controlled, however its power and energy can be redirected in order to take advantage of its flow.
To those who accept that chaos is the basis for all, it becomes a tool in the right moments rather than a negative. Wait for the wind to blow in the right direction and use the tool you built, harnessing its power, to navigate your ship to the to the promised land.
A windmill will move to position itself in the right direction to transform chaotic winds into energy. At the same time windmills are designed to automatically shut down when wind speeds exceed a certain threshold, known as the "cut-out speed,".
In the same way, we will explore structure to expose yourselves to a positive chaos skew as well as protect us from danger.
The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies.
- Napoleon Bonaparte
The Chaos Turbulences: Avoidable Drag
I want to you to think of chaos in two groups. The first one is the overall chaos distinguished by its randomness. The second kind is unavoidable chaos that is characterized by volatility. That is also where the risk lies.
Randomness Chaos
Picture a surfer patiently waiting on the ocean, for the perfect wave to surf. Most waves are too small, too inconsistent and not worth the try, however once in a while, a smooth rolling giant comes along that allows the surfer to take his chance to ride it.
This does not mean he will manage to, but what the surfer does, is understanding that the small waves are not worth thinking about, he looks past them and focuses on what matters. He paddles past all the small chaotic waves to reach the perfect spot to catch THE wave.
He creates structure to avoid being exposed to what does not matter to him and his goal. He creates structure within chaos.
The metaphor above should illustrate what I do on a day to day basis. I create structure around me, either through chronological or technological structures to guide me through the chaos rather than try and fight it.
Chronological structure
I go to bed and wake up at specific times which allows me to get the same news flow each morning, the same individuals at the same time, it allows me to know what type of information I get exposed to or at leas the sources.
I only talk to my pod until 9:25am (ET). They allow me to get fact checked and make sure all my research was done properly. Once that time has been reached, I leave the room to execute my plan. I can simply avoid the chaos of different opinions by leaving and coming back once the trade plan has been executed from start to finish.
I do my review at 4:30pm (ET) until about 5:30pm. I do not get exposed to the twitter posts or opinions about execution until I have review it for myself.
Trading is the art of mastering yourself and your processes. These few examples of chronological control give you the opportunity to fully express who you are as a trader, avoiding the drag chaos that others bring to it.
It is ironic that 99% of traders listen to the 99% others, while the 1% listens to the 1%… themselves. Control the noise.
Technological structure
I set up my trading platform only to show me the plays I am able to play. If it shows up, I know exactly the odds I have on the specific setup. I do not even get the chance to be exposed to what others want to trade or anything chaotically random. If I see it, I have a positive skew on it.
I only follow a few selective individuals on twitter. My twitter follows are built in a manner that exposes me only to what I want to be better at. I followed day traders with charts back then to learn to execute. My follows now are either coding, psychology masters, investors or macro analysts. These are the spaces I continuously try to better myself at.
I avoid the chaos of random information by creating a structure that only allows me to see a positive learning skew.
Technology can be set up to only show you the information you want. Most however misuse it to get more random informational stimulus. Use technology for your benefit!
Structure is not the cage that imprisons the mighty tiger, it is the ozone layer that preserves life on earth and lets us strive.
Take advantage of my partnership with my only broker CenterPoint and the deal we worked on for the past months
Volatility Chaos
Once you structured your life to receive the information you want and need, the rest of the chaos revolves around the volatility skew of events also called the Fat tail or black swan. This is true both in terms of information as well as in execution and risk management. Let me explain.
You build a house on one specific pillar to hold it all together. How did you choose the pillar? You listened to one ‘expert‘. The house implodes and you perish.
You see a trade that has 95% odds to be back at the open by the close. You start in, add more at +10%, more at +20%, even more at +40% and you blow up at +70% only to see it go all the way back down to the open into the close.
In both examples, you mistook the high odds (win rate) as safety. The volatility of the risk curve is as meaningful as the odds themselves, however you can build structure to mitigate the risk within this chaos.
The 0 Correlation Certainty
If you did ask 10 experts, that have never worked together, do not know each other and studied in different top universities across the planet about your pillar question and you got one answering that one pillar is enough vs 9 others telling you to use 2, you would have a high certainty that you needed two.
The higher the number of uncorrelated (or low correlation) inputs you can get, the higher the likelihood you won’t be exposed to the volatility of a mistake.
Exponential Asymmetric bets
People would rather be right than make money. Trading is an art that presents random odds most of the time, however it presents skews within that randomness.
My aim is to keep away from the black swan/fat tail risk, thus I will only get bigger into positions when I am right(going into the money). I want to limit my risk to either a small loss and move it to breakeven once I am proven right.
Not only will I let that winner ride but I will add to the position and then let it compound as it continues to prove me right.
An example for this would be buying a stock like Google, Amazon or really any quality name on the dip… Let us say at mid 90s (current price) risking the low at mid 80s with a sizable starter. If I am wrong I will take my small loss and move on. If however I am right, I could be able to add on the 200ema reclaim, at the all time high breakout and following structure or even future bear markets, so does Jeff Bezos.
15% growth coming from that initial stake could double that initial investment within 5 years and by year 15, you would be returning more than your initial stake each year. You let a positive skew and compounding open up an asymmetric bet.
Warren Buffett uses this idea to invest and is one of the richest men alive.
I use this approach both in my investing philosophy by adding my winners by rolling my profits from my active day trading as well as in my active day trading by cutting my starters when the stock goes against me and continuously adding to my winners when proven right.
I posted an example of it last Friday on which day I made $176,599 day trading on an about $2 range by starting in with a small 25k shares starter. I pyramided the position into a sizeable position once I knew I could reduce my risk to 0. Either a breakeven trade or a big winner.
Temptation arises when you get inputs from a chaotic routine and structure. The discipline to use simple structures allows you to experience pure efficiency in learning, executing, and in life. It is freedom to evolve.
Structure within chaos is something I formulated together trading through the extremely volatile market of 2020 with one of the greatest traders I ever met and in partnership with a performance coach.
It is one of the mental models that made the biggest difference in my life and has shaped my life to become a constant search for safe growth.
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I really appreciate this post, each paragraph has so much wisdom in it. Thank you!
Very insightful!