Learn from your mistakes

I've just finished reading Black Box Thinking by Matthew Syed, and I wanted to share some key takeaways and how the experience has helped me develop into a better trader. Mainly: how to embrace failure and use it as a learning experience, and why 'elite' traders have more in common with airline pilots, while amateur and retail traders are more in line with medical thinking and its attitude towards learning.

The difference between science and previous ways of trying to find out truths is, in large part, that scientists are willing to test their ideas, because they don't regard them as infallible… You have to put questions to nature and be willing to change your ideas if they don't work. (Matthew Syed)

Markets have a habit of teaching us a lesson or two, and how we process those lessons matters to our success. At some point we need to embrace the 'logic of failure' and improve our understanding and our behaviour. The market gives you plenty of feedback through your trading statements and your P/L: a feedback loop that doesn't lie.

Syed talks about two types of feedback loop, 'closed' and 'open', and looks at two sectors in particular: the airline industry and healthcare. Historically, they have taken different approaches to failure and learning, although I think there has been a convergence, and an improvement in thinking, of late, and Syed acknowledges this. I believe the different experiences of these industries can be useful to a lot of traders.

The airline industry uses an 'open' loop, where failures are acknowledged openly and transparently, analysed, and then learned from. Healthcare has tended to use a 'closed' loop, where mistakes can be covered up and excused away, thanks to opaque data and the wish to protect reputations.

Airlines and pilots, on the other hand, have adopted an open loop, with a collective ethos of learning where the best lessons come from our mistakes. The more we analyse and track the 'error signal' (timing, sizing, entries, exits and so on, and how often each happens), the better we understand its cause and effect. Then we use that learning to whittle the errors out over time.

One other feature: they practise, practise, practise! Learn on the ground, not in the air. They test their ideas in a continuous, iterative structure, identifying and improving. Never accept the status quo. Pro traders still use a demo to back-test new strategies, or to run new ideas over multiple scenarios, before committing capital.

If we refuse to accept failure in the short term, the inevitable outcome is that we can't improve, and we lose much bigger in the long term! Just accept it, learn, and bounce back.

Marginal gainsSyed talks about the practice of breaking a problem into millions of parts, making each part better by the smallest fraction, and putting it all back together. Trading successfully is a huge problem: extremely complex and forever changing. Focus on one aspect of your trading, trade entries for example. Keep the data and use it to improve.

The journalKeep a journal, and create an open 'optimisation loop' (your journal) that you can use to keep improving on the status quo. You need data.

Treat failure as a learning process, and trust the power of process over improvisation. Difficult times come to us all; what matters is how we choose to learn and adapt. In typical Darwinian fashion, that is what decides whether we survive and thrive or dwindle and die. When you have a deep learning process, and you embrace failures of every kind as a learning opportunity, your motivation and self-belief aren't threatened by them.

When we're afraid of being wrong, and the desire to protect the status quo is particularly strong, mistakes can persist in plain sight almost indefinitely. We admit to a minor flaw to avoid admitting to a much more threatening one. Embrace your failures and use them as a powerful growth tool.

Until recently, medicine was bleeding patients to death because it thought it was good for them. Medicine has a habit of being slow to adapt to, or adopt, new best practice, like the many struggling traders who bleed to death.

Many of the strong traders I've come across are like the airline industry: they learn from every detail, and every error is scrutinised. A difficult landing, a change in fuel load, an equipment failure, and so on. Most importantly, the industry shares this information. Sharing allows faster growth and learning.

Learn from the mistakes of others. You can't live long enough to make them all yourself. (Matthew Syed)

The reason is not difficult to see: if we drop out when we hit problems, progress is scuppered, no matter how talented we are. If we interpret difficulties as indictments of who we are, rather than as pathways to progress, we will run a mile from failure. Grit, then, is strongly related to the Growth Mindset; it is about the way we conceptualise success and failure. (Matthew Syed)

Mental toughness and heart are essential in this game. Think of yourself as a boxer: you get knocked down, but you get up again. Just remember to make those knockdowns count. Muhammad Ali wasn't a better boxer than George Foreman in the Rumble in the Jungle, or stronger. In fact, quite the opposite. He just had more heart!

First written for the Convergent Trading blog, 2023.