Mar

28

 I just recently finished the book The Design of Everyday Things, by Donald Norman and found it a treasure trove of useful advice for designing and maintaining all types of systems. The book contains chapters on feedback, mappings between thoughts and actions, human logic patterns, and the psychology of choice. There are many examples of really bad design and what not to do (what to avoid). But at the end of the book there is a summary of seven basic principles involved in good design. The book is a bit deeper than these seven principles, but I have been mulling these over and will try here to briefly relate these principles to trading.

1. Use both knowledge "in the world" and knowledge "in the head."

Patterns and back testing are fine but they cannot tell you that tomorrow is the unemployment day, or that Bernanke is speaking at 10 today. Therefore, a trader needs both the knowledge contained within the numbers, and knowledge outside of the numbers.

2. Simplify the structure of tasks.

Trade the anticipated move in your market in the most direct way possible with the fewest instruments possible.

3. Make things visible.

Know your position at all times. Have the p/l updating in real time. Know where you are relative to your margin 24/7/365.

4. Get the mappings right.

Keep the rudder steady. If you trade reversals stick with that. If you trade momentum stick with that. Don't go back and forth simply because of recent p/l. Don't flop back and forth during the day between long and short. Don't completely reverse course because of a loss. Nothing is worse than taking a loss in both directions on the same day. Know the 1000% per century drift. Trade with it as much as possible.

5. Exploit the power of constraints.

Know when the big announcements are coming. Know how volatility changes as you get close to the end of the trading day, the trading week, and the fiscal quarter. Know where the shoals are and account for them in your trading and placing of orders

6. Design for error.

We all have placed shorts when we meant to place longs. We all have put in orders for 1000 when we meant 100. Have a system in place to catch these mistakes before they kill you. Set your limits in your trading platform. Check your position frequently. Have a backup source of capital ready for the margin call. Diversify. Train the spouse in methods of dealing with the inevitable "rough day at the terminal."

7. When all else fails, standardize.

If you are having trouble initiating positions, buy and sell on a scale. Use limit orders. Be consistent in your scales; don't change them day-to-day. It's hard enough making a judgment whether things are bearish or bullish, where to be placing orders, let alone monkeying around with the structure of the scale. Trade based on the system, not whether you had great romance the night before or too much coffee this morning.


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