Trading, bridge, and baseball.

Trading
A few days back I read this excellent book on the psychology of trading. For those of you who are new to what trading means, it basically is buying low and selling high, and is technically different from investment. Perhaps it could be aptly described as a form of speculation. The book, entitled Trading In The Zone by Mark Douglas discussed the notion that traders have to develop a unique mindset and a set of beliefs that allows the market to be seen in the most objective manner possible in order to succeed. Well it may sound like he is being plain obvious here but trust me he isn’t.

Here are the five principles in which he claims to be the most important for traders to internalise:

1. Anything can happen.
2. You don’t need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique.

In other words, what traders should strive to accomplish is to develop a set of variables called an edge that is easily monitored and follow the entry and exit rules prescribed by the edge strictly. So long as one is consistent in one’s methods then it would not be long before the odds start working in one’s favour. As Mark Douglas aptly puts it, it is like becoming the slot machine in the casino – you know that the odds are stacked in your favour at any particular moment as long as you stick to the rules you defined for yourself.

Bridge and other card games

In a way this principle can be applied to games of chances. Contract Bridge is one that immediately pops to mind. Contract Bridge can be described as an anti-entropy game. Players start with 52 unknown cards and by the end of the hand, the position of all 52 cards will have been revealed and known to everyone at the table. The two phases of the game, namely, the auction and the play will facilitate the unraveling of the cards. Players pass information about their cards to their partners and inevitably, and rather unfortunately, to their opponents as well through the auction/bidding process. The two sides will fight and compete for the chance to play the hand in their favoured suit, and in the process, communicate their hand shapes to their partner and reach the best possible level to play in.

The play afterwards is a lot more straightforward. Each player will take turns to play a card until all thirteen cards are played. Players must always follow suit if they can, and if they cannot, they can choose to either discard or play a card from the trump suit. In many ways, both the bidding and play processes mirror that of speculating in markets. Players are given complete liberty and freedom of choice to decide what bid, and what card to play, limited only by the basic rules of the game; in financial markets, speculators are given the choice to buy or sell any amount they wish to, as long as they have the collateral to back their purchases and they stick by the basic rules of trading. In both cases above, the player can only succeed in the game if they choose to impose certain rules and restrictions on themselves, in order to limit the amount of freedom they are given. The quality of this rule-defining process, and how well players stick to the rules they set for themselves  are what differentiate the poor players from the good ones.  Playing good bridge and speculating wisely both involve setting clear expectations and limiting one’s risk. It does not pay to take a view on a certain layout of cards or insist on a market situation when things are far from clear – it is better to follow the rules, set clear defined boundaries of risk-taking and allow the rewards to come as they may.

Play in bridge hinges on similar concepts. There is always a superior line of play, although at times the superior line could fail because the actual layout happens to be a rather unfortunate one. In which case, there is nothing the player can do except pat himself on the back and mumble ‘sorry partner’, because he has done his b, est with the given information. For a trader, the same can happen when he goes with the highest probability trade but the market reverses on him and causes him to lose. However, both cases are unique occurrences and if your perceived odds are correct, these should be exceptions that do not occur frequently. The key here is not to lose state, not to be emotionally affected and simply move on to the next board or trade.

Baseball

In a recently released movie entitled Moneyball, a fairly interesting idea is floated. The plot features a team manager who attempts to build a baseball team based on notions of probability and statistics. He hires an analyst from Yale who compiles statistical data of baseball players and arrives at all sorts of weird and unnatural conclusions. Following strictly to the system prescribed, the manager ended up with a messy team of ‘2nd-rate players’ and the odds appeared to be against him when the team performed badly at the start and lost many games. Yet he did not give up and he tried giving advice to each player personally. Surprisingly, that worked as everyone played to their strengths and the whole team flourished. This led them to beat the record of most number of wins in a row and eventually enter the playoffs. Although they did not win in the end, it was still a remarkable comeback that proved a point to the baseball community.

The idea here is strikingly similar to the ones brought up earlier, mix and match the players based on law of probability and you’ll get a star team. Maybe everything in life is pretty related after all, and clearly probability is a common vein.

Free education

Trawling my facebook feed as usual, in an attempt to distract myself with something interesting, I stumbled on a post made by a friend:

You can spend your time interning at a big firm. Maybe you’re working for the $1,800 they pay you a month. Maybe you find them ernest, young and sachsy. But the fact is that you will be spending most of your time punching holes, entering data, proof reading the proof reader’s documents on a desk occupied by you and three other interns like you. You will be doing things people don’t want to do, and to avoid that, you wait in the pantry till 6pm.

Or you can join us. We can’t pay you, but we can give you the experience of your life. Do crazy things, do it however you want, do something meaningful, something beyond what names and salaries can provide you. We simply say, “this is what we want. Now go ahead and amaze us.” Create something more than a line on your resume.

Join us, and work with some of the craziest people you will ever meet.

If you think this is really cool, you are not alone 🙂

This initiative is set up by a group of singaporean JC graduates, which is the equivalent of a high school graduate in the United States. They come together and create free lectures that teach the A level syllabus, and have since garnered the support of many students and even caught the attention of the local media. A great idea isn’t it?

In fact, I think this is awesome. I have always loved the idea of free education, that is made easily accessible to everyone. Openlectures functions on the belief that there will always be spontaneous and talented individuals in society who do not mind contributing their effort and skills for no form of material gratification. These are the people who only seek sense of satisfaction that they have helped another person and made a difference to the world.

The world needs more people like this. People who are passionate about their cause; people who don’t mind helping others and not getting anything in return; angels who are willing to serve society with their gifts.

If you are yearning to play a part in shaping the future of education, and in influencing the lives of students, do support their cause! Check out http://openlectures.sg/opportunities/ for more information. I am sure they would love more helpful individuals joining them.