It's hot!

I'd much rather have triple digit gains than triple digit temperature readings.

Risk management when flying on autopilot

How many bloggers who write about things financial would ever think to read the “Risk Management Handbook”" (2009) put out by the Federal Aviation Administration and available for free download? Yeah, probably one. Since its primary target is pilots of non-commercial aircraft, sometimes the handbook reads like a driver’s manual. How long does it take for two aircraft flying toward each other at speed x to impact? How do you calculate rate of climb so you don’t fly into the side of a mountain? Why is it a really dumb idea to replace a bolt in your plane with one bought at the local hardware store?

Here I’m limiting myself to avionics. An automated (or advanced avionics) aircraft is essentially a two-screen system. The left computer screen is the primary flight display; the right screen is the multifunction display, which includes GPS with traffic and terrain graphics and a fully integrated autopilot. A typical autopilot system is the little black box pictured at the beginning of this post.

Although most of the aviation community believes that automation has made flying safer, what are some limitations of automation? First, pilots who fly automated aircraft tend to lose their stick-and-rudder proficiency. Second, when air traffic control notifies pilots of a route or approach change, the crew has to reprogram the unit. This normally occurs prior to takeoff and prior to landing, which means that “a flurry of reprogramming actions occurs at a time when management of the aircraft is most critical.”

Perhaps the most serious problem is that pilots can easily “slide into the complacent role of passenger in command.” Studies confirm that “humans are characteristically poor monitors of automated systems. When passively monitoring an automated system for faults, abnormalities, or other infrequent events, humans perform poorly. The more reliable the system is, the worse the human performance becomes. For example, the pilot monitors only a backup alert system, rather than the situation that the alert system is designed to safeguard. It is a paradox of automation that technically advanced avionics can both increase and decrease pilot awareness.” (7-10)

As trading becomes increasingly automated, we might do well to heed the words of caution from the world of avionics.

Happy Fourth!

Today is Independence Day in the U.S. I briefly contemplated writing something about the notion of independence as it relates to the independent trader but decided that such a post would desiccate a very rich concept. So instead I’m going to celebrate independence, which at least in part includes the freedom to disagree, by linking to a high frequency cartoon version of a quasi-Marxist analysis of the crises of capitalism. I assume that no one who reads my blog comes close to being a Marxist, but this offering by the ever clever RSA Animate is worth looking at. And if you find his argument wanting, there is, naturally, a critique.

52 proven stress reducers

This list is available from innumerable sites, but rather than make you undergo the stress of another click, here it is:

1. Get up fifteen minutes earlier in the morning. The inevitable morning mishaps will be less stressful.
2. Prepare for the morning the evening before. Set the breakfast table, make lunches, put out the clothes you plan to wear, etc.
3. Don't rely on your memory. Write down appointment times, when to pick up the laundry, when library books are due, etc.
4. Do nothing which, after being done, leads you to tell a lie.
5. Make duplicates of all keys. Bury a house key in a secret spot in the garden and carry a duplicate car key in your wallet, apart from your key ring.
6. Practice preventive maintenance. Your car, appliances, home, and relationships will be less likely to break down/fall apart "at the worst possible moment."
7. Be prepared to wait. A paperback can make a wait in a post office line almost pleasant.
8. Procrastination is stressful. Whatever you want to do tomorrow, do today; whatever you want to do today, do it now.
9. Plan ahead. Don't let the gas tank get below one-quarter full; keep a well-stocked "emergency shelf" of home staples; don't wait until you're down to your last bus token or postage stamp to buy more; etc.
10. Don't put up with something that doesn't work right. If your alarm clock, wallet, shoe laces, windshield wipers - whatever- are a constant aggravation, get them fixed or get new ones.
11. Allow 15 minutes of extra time to get to appointments. Plan to arrive at an airport one hour before domestic departures.
12. Eliminate (or restrict) the amount of caffeine in your diet.
13. Always set up contingency plans, "just in case." ("If for some reason either of us is delayed, here's what we'll do. . ." kind of thing. Or, "If we get split up in the shopping center, here's where we'll meet.")
14. Relax your standards. The world will not end if the grass doesn't get mowed this weekend.
15. Pollyanna-Power! For every one thing that goes wrong, there are probably 10 or 50 or 100 blessings. Count 'em!
16. Ask questions. Taking a few moments to repeat back directions, what someone expects of you, etc., can save hours. (The old "the hurrieder I go, the behinder I get," idea.)
17. Say "No!" Saying "no" to extra projects, social activities, and invitations you know you don't have the time or energy for takes practice, self-respect, and a belief that everyone, everyday, needs quiet time to relax and be alone.
18. Unplug your phone. Want to take a long bath, meditate, sleep, or read without interruption? Drum up the courage to temporarily disconnect. (The possibility of there being a terrible emergency in the next hour or so is almost nil.) Or use an answering machine.
19. Turn "needs" into preferences. Our basic physical needs translate into food, water, and keeping warm. Everything else is a preference. Don't get attached to preferences.
20. Simplify, simplify, simplify. . .
21. Make friends with non-worriers. Nothing can get you into the habit of worrying faster than associating with chronic worrywarts.
22. Get up and stretch periodically if your job requires that you sit for extended periods.
23. Wear earplugs. If you need to find quiet at home, pop in some earplugs.
24. Get enough sleep. If necessary, use an alarm clock to remind you to go to bed.
25. Create order out of chaos. Organize your home and workspace so that you always know exactly where things are. Put things away where they belong and you won't have to go through the stress of losing things.
26. When feeling stressed, most people tend to breathe short, shallow breaths. When you breathe like this, stale air is not expelled, oxidation of the tissues is incomplete, and muscle tension frequently results. Check your breathing throughout the day, and before, during, and after high-pressure situations. If you find your stomach muscles knotted and your breathing is shallow, relax all your muscles and take several deep, slow breaths.
27. Writing your thoughts and feelings down (in a journal, or on paper to be thrown away) can help you clarify things and can give you a renewed perspective.
28. Try the following yoga technique whenever you feel the need to relax. Inhale deeply through your nose to the count of eight. Then, with lips puckered, exhale very slowly through your mouth to the count of 16, or for as long as you can. Concentrate on the long sighing sound and feel the tension dissolve. Repeat 10 times.
29. Inoculate yourself against a feared event. Example: before speaking in public, take time to go over every part of the experience in your mind. Imagine what you'll wear, what the audience will look like, how you will present your talk, what the questions will be and how you will answer them, etc. Visualize the experience the way you would have it be. You'll likely find that when the time comes to make the actual presentation, it will be "old hat" and much of your anxiety will have fled.
30. When the stress of having to get a job done gets in the way of getting the job done, diversion - a voluntary change in activity and/or environment - may be just what you need.
31. Talk it out. Discussing your problems with a trusted friend can help clear your mind of confusion so you can concentrate on problem solving.
32. One of the most obvious ways to avoid unnecessary stress is to select an environment (work, home, leisure) which is in line with your personal needs and desires. If you hate desk jobs, don't accept a job which requires that you sit at a desk all day. If you hate to talk politics, don't associate with people who love to talk politics, etc.
33. Learn to live one day at a time.
34. Every day, do something you really enjoy.
35. Add an ounce of love to everything you do.
36. Take a hot bath or shower (or a cool one in summertime) to relieve tension.
37. Do something for somebody else.
38. Focus on understanding rather than on being understood; on loving rather than on being loved.
39. Do something that will improve your appearance. Looking better can help you feel better.
40. Schedule a realistic day. Avoid the tendency to schedule back-to-back appointments; allow time between appointments for a breathing spell.
41. Become more flexible. Some things are worth not doing perfectly and some issues are fine to compromise upon.
42. Eliminate destructive self-talk: "I'm too old to. . .," "I'm too fat to. . .," etc.
43. Use your weekend time for a change of pace. If your work week is slow and patterned, make sure there is action and time for spontaneity built into your weekends. If your work week is fast-paced and full of people and deadlines, seek peace and solitude during your days off. Feel as if you aren't accomplishing anything at work? Tackle a job on the weekend which you can finish to your satisfaction.
44. "Worry about the pennies and the dollars will take care of themselves." That's another way of saying: take care of the todays as best you can and the yesterdays and the tomorrows will take care of themselves.
45. Do one thing at a time. When you are with someone, be with that person and with no one or nothing else. When you are busy with a project, concentrate on doing that project and forget about everything else you have to do.
46. Allow yourself time - everyday - for privacy, quiet, and introspection.
47. If an especially unpleasant task faces you, do it early in the day and get it over with, then the rest of your day will be free of anxiety.
48. Learn to delegate responsibility to capable others.
49. Don't forget to take a lunch break. Try to get away from your desk or work area in body and mind, even if it's just for 15 or 20 minutes.
50. Forget about counting to 10. Count to 1,000 before doing something or saying anything that could make matters worse.
51. Have a forgiving view of events and people. Accept the fact that we live in an imperfect world.
52. Have an optimistic view of the world. Believe that most people are doing the best they can.

IFTA Journal

I just learned that the IFTA Journal, the sometimes annual publication of the International Federation of Technical Analysts, is available online. So if you’re bored over the weekend, perhaps you’ll find something within these pages that interests you.

Secrets of success

As we in the U.S. prepare for the long holiday weekend, here are a few thoughts on success (taken from an e-book that promotes a website that sells lots of “secrets”). Many are familiar, but that doesn’t detract from their merit.

“I know the price of success: dedication, hard work and unremitting devotion to the things you want to see happen.”—Frank Lloyd Wright

“The measure of success is not whether you have a tough problem to deal with, but whether it’s the same problem you had last year.”—John Foster Dulles

“To laugh often and much; to win the respect of intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends. To appreciate beauty; to find the best in others; to leave the world a bit better whether by a healthy child, or a garden patch or a redeemed social condition; to know that even one life has breathed easier because you have lived. This is to have succeeded.”—Ralph Waldo Emerson

“Success is the result of good judgment, good judgment is a result of experience, experience is often the result of bad judgment.”—Anthony Robbins

“Always bear in mind that your own resolution to succeed is more important than any other one thing.”—Abraham Lincoln

“Before everything else, getting ready is the secret of success.”—Henry Ford

“Patience and tenacity of purpose are worth more than twice their weight of cleverness.”—Thomas H. Huxley

“If everything seems to be under control, you’re just not going fast enough.”—Mario Andretti

Seizing opportunity in an uncertain world

The other day Mohamed El-Erian referenced Donald Sull’s The Upside of Turbulence: Seizing Opportunity in an Uncertain World (HarperCollins 2009). I don’t have a copy of the book, so I’m at the mercy of the bits that are publicly available.

The gist of the book seems to be that "our theories about the future remain subject to revision or rejection in light of new knowledge that might arise in the future. All our theories will let us down; we just don’t yet know how or when.” So we have to be agile; that is, we need “the capacity to identify and capture opportunities more quickly than rivals.” (p. 138)

It is critical to understand who’s on our playing field, who our rivals are. We need not be more agile than high frequency traders if they are not our rivals. We can play a very slow game if we’re competing against pension funds, a faster game if we’re swing trading, and must be considerably faster if we’re scalping intraday. We shouldn’t feel disadvantaged because we’re not the speediest players in the markets; we just have to be more adroit than our adversaries. And this means, as I mentioned the other day, acting on the least amount of information necessary to reduce the inevitable uncertainty.

Market players should be well aware that “all our theories will let us down.” A trending market stops trending, momentum gives way to mean reversion, and theories of regime change are in constant need of revision themselves. After all, we have to remember that we’re trying to predict what our rivals will do in the future, they are trying to predict what we will do, and no one has a crystal ball. In some limited sense we’re predictably irrational, as Dan Ariely wrote; we leave footprints on every chart. But circumstances change, and we are often caught flat-footed.

Staying nimble is difficult on many levels. We certainly don’t want to flit from trade to trade and strategy to strategy at the slightest sign of weakness. We have to distinguish between a theory that is being challenged and one that is failing (or has failed). There are lots of meta-theories here, most of them grounded in history. But since we’re talking about the present and the future, and history keeps shifting forward, they’re also subject to revision.

We must accept the fact that we’re trying to make money based on uncertain cues and uncertain prospects and that we’ll find certainty nowhere. We don’t know which trades will fail and when and how they will fail, which theories will fail and when and how they will fail. It doesn’t matter how smart we are, how experienced we are, we’re mired in uncertainty. The upside is that our rivals are no better off. If we can reduce uncertainty even slightly and act on our perceived opportunity quickly and decisively, we should have a clear edge over our rivals.