Option Investor
Trader's Corner

Heisenberg's Uncertainty Principle for Market Commentators

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"He doesn't really trade, you know," someone writes, referring to another writer on the site. I can almost hear the hushed voice behind the written words, the slightly gleeful edge to that voice. I've received similar comments before, with only the subject of those speculations changing from time to time.

I don't engage in such speculation, and there's a reason that goes beyond my loyalty to coworkers and the site. I don't care if a commentator is trading or not as long as that commentator's advice gives me a new perspective on the markets or helps me be a better trader.

For the record, as I'm roughing out this article late in September, I, as the trading spouse in my marriage, have open in the portfolio I share with my husband more than 130 contracts of bear call spreads and more than 40 contracts of bull put spreads, as well about 450 shares of stock. The end-of-quarter rally allowed me to close out some of my October bull put spreads well ahead of October's option expiration for a minimal amount and I have yet, as of late September, to enter any bull put spreads for November, accounting for the discrepancy in the numbers of the bull put and bear call spreads. There aren't a lot of full condors there. Still, that number of trades and contracts qualifies me as a trading writer. It should allow me to speak with some validity about this issue to those subscribers who believe a financial writer must trade.

That concern about who actively trades and who doesn't isn't limited to subscribers to this website. Blogs caution that traders need to know who is trading and who is not "putting his money where his mouth is." The implication, of course, is that the financial writer suspected of not trading is somehow less skilled than other writers, his or her comments less useful, and that the commentator is perhaps not quite honest or straightforward. But is that true?

I don't think it's always necessary for a financial writer to be trading, or, to reword that statement a bit, for a writer to be always trading. In fact, I propose that, particularly for those writers who deal with directional trades, there ought to be some periods when they're not trading and advising readers not to do so, either. As I'm writing, markets have been driven up during quarter-end window-dressing activities and, for several days, have been sitting near their highs, with breadth and technical indicators looking wacky. That's not a good environment for trading, and many of the writers on the live portion of the site have been commenting on that environment and perhaps restraining themselves from trading too heavily in their personal accounts, too. That's a sound practice, in my opinion.

Those who have emailed me about some other non-trading financial writer aren't talking about a few days of not trading, however, but about a more prolonged period. Let's consider whether an extended period of not trading makes a writer less reliable a market guide. My take on the situation might be a little different than those you've heard up until now.

I understand the arguments. Our readers tend to like their commentators right in the trenches with them, trying to get that same fill they're trying to get. When Mike Parnos of Couch Potato fame suggests a condor or a spread and a potential price target for those plays, readers know that he's likely trying it himself and has a good idea what credit readers can get for those credit spreads. There's certainly something to be said for that kind of in-the-trenches-with-you advice. He and other writers like him know what works in the real trading world and what doesn't. I value his in-the-trenches-with-you advice, although I sometimes am not in exactly the same trades he is. I don't have to be to benefit from his advice and from a study of his reasoned approach.

Sometimes, too, it works well to see a writer's disappointment or anger or joy when markets move and a trade either doesn't work or works. We benefit from learning how that writer controls that emotion, decides to refrain from trading if conditions aren't right, or even musters the courage to try again after a failed play.

However, I want to pose another viewpoint. There's also something to be said for the objectivity that arises when a financial writer refrains from trading. Some websites prohibit their financial writers from trading anything they're mentioning in their commentary for this reason.

We all try not to get too invested in our trades, but especially for those trading directional trades, whom are we kidding? Of course emotions are involved. Some writers just control them better than others, but all want the markets to move in the direction that will result in winning trades. When we're in such a play, we pray, literally sometimes, that markets won't move in such a way as to produce losses.

So, a problem sometimes arises. We can, no matter how much we strive not to do so, hope--that dirty four-letter word in trading--so hard that we make ourselves believe that markets are due to turn around and go the direction we want any moment. Most financial writers who are also trading control those emotions enough that they can study the markets with relative objectivity. They wouldn't have survived in this business if they couldn't do so. However, hope is hard to completely eliminate, particularly when every technical and breadth indicator tells us that the markets should go one way and they're stubbornly refusing to head that direction.

Did you catch the anthropomorphism in that last paragraph, the investing of market behavior with a mind, a willfulness, an ability to be stubborn? That's the kind of thinking that sometimes catches all of us when we're actively trading, even financial writers who are practiced at turning a supposedly objective gaze on those charts. I deliberately employed that anthropomorphism to make a point, but that kind of thinking creeps up on every trader, no matter how trained in objectivity.

Several conditions converged a couple of years ago that kept me from trading for many months. A granddaughter's health limited my time and my composure. It forced me to choose my personal trading or my work because I had neither the time nor the emotional energy to do both. About the same time, an outside event made that choice easier. A new disclaimer was temporarily added to the site. My interpretation of the disclaimer was stricter than the intention behind it, certainly, but I felt prohibited from trading. I decided to honor my stricter interpretation rather than the one most others felt more reasonable. I stopped trading until the disclaimer changed again, by which time my family situation had changed, too.

Consider my reasons for not trading during that period: personal and ethical. Do you really want advice from a commentator who does not know when to back off from trading, and keeps trying no matter what the conditions that might impact concentration, or one who does not honor her ethical convictions? Was recognizing my time constraints and ethical concerns a sign that I was less skilled a commentator than I had been earlier or would be again, whatever level of skill you consider that I have? I don't think so, and I don't believe it of other commentators who might refrain from trading for other, outside reasons.

During my several-month hiatus from trading, I continued commenting on what I saw developing each day, and I made some valuable discoveries. At that time, I was still writing for the live Market Monitor in addition to writing articles. Soon, I discovered something I had suspected but never until then tested. When my own emotions were removed and I had nothing at stake other than my desire to provide as sound a commentary as I was capable of providing, my observations were based purely on what I saw developing on the charts. I didn't hope the markets went any direction at all, and I could calmly assess what I saw developing. I didn't care where the markets went, other than that I knew shorts would be hurt if markets went one direction and bulls, if they went another, and I do care about our readers.

If markets weren't behaving according to the predictions of technical analysis, I wasn't tempted to keep suggesting that they should soon do so. I more quickly recognized that something wasn't working right and advised subscribers accordingly. If prices were bouncing up or down from some key moving average, I could see that action with clear eyes. I wasn't focused on my hope that the move was so extended that it would end soon, something I perhaps needed to happen since I had jumped in too soon with a new position. My view wasn't clouded by my own emotions or my own trades.

Of course, eventually I lost some of that well-honed feel for how much traders could shave off the bid/ask spread on an OEX option when they were entering a play. I didn't have as good a sense of how inflated the options would be at what time during amateur hour and when exactly they might calm down again. Those and similar concerns comprise the admitted problems with a non-trading financial writer.

Back when I was studying physics in high school and college, we learned about Heisenberg's Uncertainty Principle. In simple words for those who don't remember it, scientists can study the position or the mass of a subatomic particle, but not both at the same time. The act of measuring the mass impacts the positioning of that particle, for example.

I think of the trading or non-trading status of financial writers in a similar way. Those writers can have current and up-to-date experience with the nitty-gritty details of trading or complete objectivity, but perhaps not both at the same time. Mike Parnos comes the closest I've seen to having both, since his style of trading allows more objectivity and less emotion. Jane Fox does a good job of unemotional commentary, too. I'm impressed by both in particular when considering objectivity, and by all the writers as a group when considering their skills and the care they devote to their commentary.

Here's something to consider. When a site has many writers, with some actively trading and some perhaps not at any one time, you might get both perspectives. Heisenberg's Uncertainty Principle applies only when you're trying to measure the position and mass of the same particle at the same time: you could accurately measure the position of one and the mass of another. You, as readers can benefit from the objectivity of one commentator and the currently-in-the-trenches experience of another.

I have no data on who is actively trading or who is not on our site. I haven't asked. I don't care. If I'm reading commentary that helps me align my own trades or points me to research to consider, which I am reading, why should I care?

The next time you're mulling over what you value in a financial writer's commentary, consider that there might be room for both types of commentators: those who trade and those who don't. Do you want in-the-trenches experience or objective commentary, or can you perhaps benefit from both on a site that features a number of writers? Think about it.

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