Dog trades

They say that you’re either a dog person or a cat person.

I may make some enemies here, but I’m going to lay my cards on the table – I’m a dog person.

What I appreciate about dogs is the way that they draw such enthusiasm from the simplest pleasures in life – a kind word from a loved one, a warm place to sleep, and a run in the park.

I believe that we “uprights” can learn a thing or two from the dog’s approach to life.

Which is why my interest was peeked by an interview I heard on the radio on Monday morning, as I ate my breakfast.

A guy named Ryan O’Meara has written a book called “Clever Dog: Life lessons from Dogs”. And Mr O’Meara was claiming that dogs might be better at investing than we are.

In fact, his claim was that if dogs were in charge of the banking sector, we wouldn’t have seen the kind of poor decisions that led to the financial crisis.

It’s a bold claim – in fact, it’s a downright crazy claim. But, never one to pass up a trading tip or piece of advice (even if it comes from a poodle!), I listened up …

The gist of it was this: dogs are good at rapid decision-making, whereas humans with our advanced big brains often over-analyse a situation. He uses the example of a sniffer dog at an airport – if it gets the scent of explosives, it will not doubt itself; it will not look for further evidence to back up its belief; instead it will make a split-second decision and act on it.

It’s a behaviour that we rarely see in humans.

Quick fire under pressure

There are many misconceptions about rapid decision-making – people often mistake this kind of behaviour for bad decision making, or for being too impulsive.

I often warn traders away from placing trades based on a “hunch” or a “gut feeling” – we need to be disciplined and logical. We definitely shouldn’t get emotional.

Yet, there’s a balance to be struck here.

On the one extreme we have the trader who is too impulsive, doesn’t follow a strategy and relies solely on hunches to get him in and out of trades. This trader is emotional and allows fear and greed to lead his decisions.

At the other extreme is the trader who is logical, who analyses every trading decision, taking different factors into account … checking different timeframes … waiting for confirmation of signals … and ultimately dithering for so long that he’s missed the trading opportunity.

The happy medium?

The ultimate state that we want to reach is where we can make rapid decisions that are based on the information we have available. These decisions may look and feel like “hunches” – but our hunches have data already “built in” to them.

How do we do this?

Well, good hunches – the kind of hunches that are successful – don’t come out of thin air. Instead they are based on years of experience at compiling information available and rationalizing that information. A good hunch also understands the things that you can’t know – the part of the story that is the risk.

And risk is always a part of any trading decision.

Many successful traders rely on this “gut” feeling. George Soros is one, “I rely a great deal on animal instincts. When I was actively running the fund, I suffered from backache. I used the onset of acute pain as a signal that there was something wrong with my portfolio. The backache did not tell me what was wrong, but it did prompt me to look for something amiss.”

So, how to we lesser mortals harness some of this decision-making mastery?

Well, big businesses pay out a lot of money to consultants to teach their staff how to think like this.

The short-cut route to rapid decision making is through the use of trading systems and strategies – these lay out the rules for us; they tell us what we need to know; they tell us what we don’t know; and they can tell us what our risk is, and what kind of win/lose ratio we can expect to achieve.

Once we have this kind of formula in place, making a fast decision is simple.

And as your knowledge of trading grows, you will find yourself applying your own experiences to your trading strategies – building in your own level of “intuition”.

Related posts:

How to hone your trading intuition into a razor-sharp tool Why do my trades keep losing?