The Perceptual Filter

I know this blog has been mainly about my life away from gambling lately, so it's about time I did a gambling post. After all, this blog was started as an essentially gambling-orientated one so this is overdue I guess.

I've been reading some articles on trading stocks and shares recently and have taken many useful lessons from them. So many in fact that my head is buzzing with new trading concepts and I really don't know what to do. Yesterday I made a stupid trade on the Twenty20 that I had to take an immediate red on, but I still feel like I have a new focus.

Anyhow, this post will be about the 'perceptual filter', and idea raised in an interview between Jack Schwager and Charles Faulkner, two established American traders.

Over on The Gambler's blog (link to the right) there is some good discussion at the moment of various trading strategies to win money on the exchanges. Seasoned traders will have found their own ideal strategy (be it backing, laying, momentum trading, and so on) and will use it with confidence when conducting their trades. However, the concept of the perceptual filter implies that strategy itself is not important. It is known that backing and laying are both methods that appear to work in order to make money, provided the person knows the method thoroughly and follows it.

Obviously there are more complicated strategies than simply 'backing' and 'laying', but for simplicity I will just keep referring to these two. If you apply the analogy of different-coloured glasses to the situation, the 'perceptual filter' can be explained easily. A backer looks at prices through red glasses, and a layer looks at prices through blue glasses. Both traders will gain experience at examing price patterns, but from different perspectives. Meanwhile, other methods of trading (different-coloured glasses) are probably absolutely useless. It's simply that instead of looking at prices through clear glass, traders who use these methods are looking at prices through different-coloured tints. The method, or tint shade, is a matter of individual preference. To extend the analogy, you can compare the methods to non-prescription sunglasses: they change the view but don't necessarily improve the vision. The bottom line is that these methods seem to work only because the people who use them have developed some sort of intuitive experience about price.

This post was inspired by the book 'The New Market Wizards' by Jack D Schwager, and some of the text above I've lifted straight from the book, so please nobody sue me!

Hopefully some of that will make sense to my readers (if I've got any)

-J