Two Mental Models for Trading Success

This is a Guest Post by Alex @MacroOps which was posted originally at: Achieve Market Mastery Through Fallibilism and Perspectivism. This post is republished here with permission.

Macro Ops is dedicated to one thing: mastering the markets.

But the path towards mastery isn’t linear. It’s a messy one that requires constant iteration, observation, backtracking, and improvement. Ray Dalio has a good visual for it:

Two Mental Models for Trading Success

The loops in the path are the necessary pain points that come with the journey. In order to push through them, you must continually self-examine to see where you can improve. An unwillingness to do so will stunt your growth and lead to plateaus.

Our team at Macro Ops employs two key mental models to keep ourselves growing rapidly: fallibilism and perspectivism.

Fallibilism states that humans can’t fully prove their beliefs and are therefore prone to mistakes. If you’re fallible then you know you’ll be wrong a lot. The philosophy requires that you’re open to new evidence that may alter or contradict your previously held beliefs. At no point should you be 100% confident in an absolute “truth.”

When we develop a trade thesis we know new evidence can potentially invalidate it. And that’s okay. It’s our willingness to shift once that evidence comes to light that matters.

A fallible trader can easily move on from a losing trade. He can create a new trade thesis with little emotional baggage from his recent failure.

Novice traders become unduly attached to their ideas. When new information arises, instead of objectively evaluating it, they automatically twist it to fit their original thesis. Their emotional attachment prevents proper objective analysis. Profits take a back seat to vindication and Twitter glory.

A master trader could care less about having the market prove him right. The goal is singular: creating outstanding risk-adjusted returns.

Letting go is painful. You might put a ton of work into an idea only to see it deteriorate a few months later, making the emotional investment tougher to unwind than the trade itself. But the best traders in the business, like Soros, were known for turning on a dime against prior convictions.

In addition to fallibilism, the second mental model we use is called perspectivism. It’s a philosophy first developed by Friedrich Nietzsche.

Perspectivism states that there are several ways to perceive a situation, each with its own merit. There’s no fundamental “truth”, only varying perspectives with different degrees of validity.

For example, some people look at the Fed’s money printing as a way to alleviate financial distress and help the economy return to an expansionary state. Others think the money printing will trash the U.S. dollar and strap the country with brutal hyperinflation.

Perspectivism states that both these views are neither right or wrong. Both are inevitably partial and limited by the individual’s perspective. There is no “right” way to interpret how money printing affects a complex system such as the U.S. economy. Instead of black and white “truths”, we live in a world of gray.

Our job is to evaluate opposing arguments and determine which perspective is most valid. This requires digging into the reasoning and logic behind each argument. From there we can judge which perspective is most likely to play out.

It’s impossible to always have the right answer. A practitioner of perspectivism relies on fellow traders’ beliefs as a tool to test and alter their own beliefs. Without this ability, it’s easy to get stuck with a stale, outdated picture of the market.

Fallibilism and perspectivism are crucial mentals models to have, but in order to use them you must check your ego at the door.

Ego prevents traders from both understanding their own fallibility and examining all perspectives. If you don’t release your ego from the trading process, you’ll be tempted to double down on market assumptions gone wrong just so you can be proven “right.”

The best traders know to stay humble. They understand that they may misread the market, but at the same time take comfort in knowing that their ego won’t take a hit if they need to change their minds. The sign of a master trader is someone who can change their mind instantaneously upon receiving compelling information that supports the other side of their trade.

Traders who adhere to fallibilism and perspectivism without ego can fly through the looping path to mastery faster than anyone else. And speed down that path does matter. Markets evolve. To stay competitive you must constantly iterate your strategy around the edges. At no point should you be saying to yourself, “Finally, I got it! Now all I need to do is press some buttons a few times a year and watch the money fly in!” That complacency will cost you in the long run.

Part of our edge at Macro Ops involves our willingness to constantly improve and press the barrier. This mentality keeps us ahead of the curve and greatly increases the probability that we’ll continue to perform in the future. We hope that you too can adopt these mental models to accelerate yourself along the path towards trading mastery.

If you want to learn more about the Macro Ops trading process, check out their 80-page Macro Ops Handbook by clicking here.

For more posts and information about Alex @MacroOps  you can check out his website