The Fifth Habit of Creative Traders: Experimenting with Your Ideas

Don’t you love it when kids go wild in a sandbox? They build bridges, rivers, castles, and moats, their imaginations going wild with what they can imagine. For kids playing in a sandbox, anything is possible. They twist their minds, try all sorts of things, learn a ton, and exit much smarter little people.

I want to encourage you to become a kid once again. Experiment, tweak, and tinker in the sandbox and on the Internet, and find what works for you.

Recently, I read Something Incredibly Wonderful Happens: Frank Oppenheimer and the World He Made Up. This is a fabulous book about the life of the famous physicist. It is a book every trader should read. K. C. Cole, the author, delves deeply into Oppenheimer’s views on experimentation and play, which were the cornerstones of his brilliance in physics:

“So much time is spent just playing around with no particular end in mind,” [Oppenheimer] wrote. “One sort of mindlessly observes how something works or doesn't work or what its features are, much as I did when, as a child, I used to go around the house with an empty milk bottle pouring a little bit of every chemical, every drug, every spice into the bottle to see what would happen. Of course, nothing happened. I ended up with a sticky grey-brown mess, which I threw out in disgust. Much research ends up with the same amorphous mess and is or should be thrown out only to then start playing around in some other way. But a research physicist gets paid for this ‘waste of time’ and so do the people who develop exhibits in the Exploratorium. Occasionally though, something incredibly wonderful happens.”

. . . He asked his friend Bob Karplus, a physicist at the University of California at Berkeley, if he thought there was anything a young person must learn before it is too late, and Karplus' answer was “play.”[1]

The physics laboratory and the Exploratorium were Frank Oppenheimer’s playgrounds. Emulate Frank and build your own trading laboratory. For you as a trader, “occasionally though, something incredibly wonderful happens” means: 

• I have finally discovered a great trading recipe.
• I have improved my trading plan.
• I have learned a new way to harness the Internet’s energy.
• I have discovered a new one-good-trade setup.
• And so on.

Be creative, experiment, observe how nature works and how humans behave, and apply your findings to the market. In your search for your trading recipe, you should heed Frank Oppenheimer’s philosophy: “Oppenheimer stressed the importance of play, courage, and guesswork Science.”[2] 

At Bigger Capital, our laboratory consists of a sandbox account (paper trading) connected to our experimental software and quote functionality via a set of APIs. The software might or might not be connected to the Twitter API depending on whether we are importing financial ecosphere data.

We have derived our trading algorithm from our body of financial knowledge, the insights we have gained from practicing our craft and interacting with like-minded individuals, and all the experience we have acquired during all the days we have been trading. We are open to trying all sorts of trading experiments. We concoct recipes. We mash up trading stuff until “something wonderful happens”—until we have a trading framework for monetizing our newly discovered insights.

As an example, we have developed many one-good-trade frameworks that are statistically profitable using statistical analysis and other methods. When you have developed such a framework, you execute another good trade, then trade another one, and then continue this process. We create trading recipes, and we use technology to multiply the do-another-good-trade-and-another-one-etc. model.

Don’t limit your experiment to your trading processes. Leave no stone unturned. Everything is fair game, including how you interact on the Internet, for generating better information. Experiment with your blog posts, your operational processes, and every single component of your business model.

The idea is to take your hunches and insights and create your one-good-trade framework. The process is similar to a sculptor starting with raw material and working his or her way to a beautiful finished product. It is creative and messy, and it requires patience and tenacity. You are an artist. Shape that framework until it works in awesome ways for you.

If you get stuck, break down the task into small chunks and iterate until you get to the desired outcome. I wrote “Break Down Your Algorithm Plan into Smaller Parts” to show you how this is done with a trading algorithm. You can apply this strategy every time you get stuck with a challenge.

Since you must stay ahead of the game and maintain your edge, always work on developing new one-good-trade frameworks. You only need a few to become rich. If you develop a few great recipes and have a vision for their proper execution, you will succeed.

Exercise:                                             

Try the following experiment: In a sandbox account, create a notional neutral (long notional-short notional=0) portfolio of stocks using the best methods you have developed to find long and short candidates. You can use our Spread Analyzer to include some pairs into this portfolio. Track the return of the portfolio and see how it performs over time. Push this exerise even further by making the portfolio beta neutral.

As you run the experiment, ask the following questions:

• Should you rebalance your portfolio at specific intervals of time to account for changes in your selection criteria or changes in the value of each position? 
• Can you think of any ways to improve your results? 
• Are you learning anything? 
• Have you observed anything unusual in how the portfolio is performing? 
• Are you generating alpha? If not, why not?

 Are you ready to experiment?

 Written by Michael Bigger. Follow me on Twitter and StockTwits.

P.S. You can learn more about the other habits of creative traders in my book titled How Traders Achieve Creative Flow.

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[1] K. C. Cole, Something Incredibly Wonderful Happens: Frank Oppenheimer and the World He Made Up, (Boston: Houghton Mifflin Harcourt, 2009), 18.

[2] Ibid., 224.