Information, Good and Bad

[dc]T[/dc]his post will be a little more personal than most. Much of my writing, whether the book, here on this blog, or in my research reports for Waverly Advisors, is an attempt to be as objective as possible, to define what we know (and what we can know) about markets as clearly as possible and then to work within those lines. This approach is powerful and, I continue to believe, really the only way to approach the problems of managing risk and extracting superior profits from financial markets. But, today, I want to write on my person feelings about incorporating outside information into your investment process. In my experiences with markets and trading, covering nearly twenty years, I’ve seen traders networks grow from early mailing lists, to bulletin boards, to chatrooms, to the modern incarnations of social media—and I’ve been a part of most of those networks as they’ve grown up. At times, I’ve traded in nearly a complete information vacuum and also have been immersed in the nearly overwhelming information flow on trading floors and at a major commodity exchange. Through all of this, one of the things I have always struggled to understand how traders can best incorporate outside information into the trading process. If this is done well, it can bring tremendous value to your trading, but many traders make mistakes that seriously hamper their trading efforts.

On one hand, you have the “more is better approach”. Wouldn’t you want to have every possible piece of information available to you at all times? At first glance, this seems like it might make sense, but we quickly realize that too much information easily becomes overload. Sometimes the information is very good but irrelevant, as it was when I was sitting on a trading desk at the Nymex near some of the best spread traders in the world. Though they understood the nuances of what was going on in Natty and Crude spreads in a depth that was somewhat baffling to me at the time, it was simply not relevant, as my job was managing a large portfolio of equities and equity options. Even the best information from the best trader in the world at exactly the right time is useless if you can’t use it. I’ve also been in a room of green traders who created a constant rumble of “information”, but it was only noise. (I remember one guy in particular who called out every time a stock touched a 7 or 11 period moving average. Every time. He also switched his charts constantly: 1 min, 5 min, 15 min, etc, so there was pretty much always some stock touching those moving averages.) If you’re receiving useless information from noise traders, well, the information is useless. Even worse, many uninformed traders are very emotional—aggressive and fearful, in turn, at nearly exactly the wrong moments. Information rarely comes to us in “pure” form—even a 140 character Twitter post can contain a strong emotional charge. Receiving information like that can be very harmful—discretionary traders cannot help but process it in some way, and even purely systematic traders may find their convictions challenged.

Also, consider that people make mistakes, or even sometimes lie. For instance, I know of one particular chart pattern that used to be in common usage. It came from a well-respected book, and you could easily find internet boards full of traders claiming to have made stupendous gains using this pattern. When other people said the pattern didn’t work for them, the standard response is something like “well, it doesn’t work for you. That doesn’t mean it doesn’t work, it just means you can’t get it work.” This particular pattern does have a statistical edge, and a significant one, but the only problem is that it is backwards. The developer got it wrong, the book got it wrong, the many websites teaching the pattern got it wrong, and every trader using it as prescribed was actually entering a market against a statistically and economically significant edge. Is it possible that someone somewhere could make money using this pattern, especially if combined with other tools? Yes, it’s possible, but it’s not likely that many people were, and certainly far too many traders were claiming consistent success with something that just didn’t work. In a world where no one can see your account statements, it’s treacherously easy to claim results and to become an expert on a topic. Boards and Twitter feeds fill with people who have made great trades on markets that have recently experienced large moves, but there’s no way to verify who really had a position and who’s just talking. In many cases, the loudest voices are the ones you want to ignore. As Yeats wrote, “the best lack all conviction, while the worst are full of passionate intensity.”

Another complicating factor is luck. People underestimate the impact of luck, both good and bad, on their trading results. People can make money doing the wrong thing, or lose money doing the right thing, and it’s human nature to want to brag a little when you’ve done well. Social media and trading boards are full of traders talking about their great trades on stock XYZ. People ask questions about how the trade was accomplished and, with the best of intentions, these traders will answer and teach, but no one says “actually, my account is flat or down for the last 12 months. I just got lucky on this particular trade.” Even with no effort to deceive, the natural selection process of the voices you will hear can work against you.

So what do we do? I can’t tell you what’s right for you, but I’ll share my conclusions and experiences here, both from producing and receiving outside information. The short summary is “be careful”. Be careful of the Twitter feed, Stocktwits board, or any ongoing discussions of markets you trade. If you can read them without being influenced emotionally, perhaps this is ok, but just realize that there are many people speaking with great confidence that might not always be justified by their level of knowledge or experience. As far as producing information, I would also urge you to be careful. There are few things as destructive as getting involved in an online disagreement with someone about a position you have or are contemplating. Even speaking in the formalized context of research or media contacts, we have to take steps to make sure that what we say does not skew our opinion of a trade or a market. Once you verbalize the reasons for a position, you’ve introduced a potentially complicating factor in your own analysis.

As some of my long-time readers know, I was once very active on Twitter, noting intraday inflections in major indexes and specific stocks, and then went to the other extreme and took a nearly year-long holiday from social media. Why? Well, it was to focus on the quality of the information I was presenting, to figure out how to best connect in a useful way with the right group of people who could make good use of that information. (For me, the answer was to focus on published, professional research, but that’s a topic for another blog post.) We do live in the information age—that information is all around us. We are immersed in it, and it is unavoidable. Traders need to realize that information often carries an emotional context, and the way in which they receive that information can often have a less-than-ideal impact on their trading results.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 5 Comments

  1. Mark

    Just curious: What’s the particular chart pattern you have mentioned in this post?

  2. Jeff Carroll


    It’s good to see your writings return. Welcome back!

    As a 20-year veteran of software development management, including the development of training associated with airline pilots and, also, video games, this area is a passion of mine, and the points that you make are excellent. An abundance of information can easily overwhelm the short term processing power of our brains, leading to reductions in actual cognitive ability. What we choose to let through is critical.

    One suggestion that I have for those wishing to filter information better–try to match the delivery method of information with how time-critical it is.

    My Twitter feed in minimal, limited to those who provide pre- or current market analysis. Those that I can read later are transferred to RSS feeds. I’ve programmed email warnings to give me contextual information about the developing day, as that changes more slowly. Audio alerts provide early warning of immediate shifts. Visual information on my charts are presented so that I can the “signals” are salient while the raw information is secondary. Dashboards that compile similar information are more difficult to create, but quite advantageous when done correctly.

    I’m lucky since I can program most of this myself, then continually review and tweak these methods just as I do my trading plan, but much of this can be done without custom work.

  3. Miroslav

    If we seek informations then we will be IN formation of that. It mean no longer us. Just some kind of formation. 🙂

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