I think most of us have heard the term analysis paralysis.
This is the condition when having too much choice, too many options, or too much noise causes an inability to take action.
Interestingly a study done several years ago on working memory may give us some clues on this condition and what we can do about it.
The impact of working memory on trading doesn’t get talked about too often, but its importance can’t be underestimated.
Working memory is different from both long and short term memory. It is the ability to hold and juggle things in your head, and the ability to shift attention between them as you solve a problem or deal with a situation.
Working memory is what allows us to drive a car while we simultaneously monitor our speed, pay attention to the road ahead, talk to the person in the passenger seat, check our rearview mirror every few seconds, etc.
Similarly, for traders it’s also what allows us to track various financial instruments across various multiple time frame charts, while understanding the overall general market direction and internals, while tracking various technical indicators, all the while evaluating whether or not a setup is about to trigger.
Working memory is a huge component of intelligence and high-level performance, no matter the task.
Improving and optimizing working memory is key to short-term traders, whereas long-term traders could probably benefit more from improving analytical skills.
However some interesting research findings that came out of MIT several years ago have clarified a lot about how working memory works at both a practical and neural level, and has interesting implications across several fields, trading among them.
Miller and Buschman tested the working memory of monkeys (which, sort of amazingly, have the same working memory capacity as humans) via a visual working memory task in which 2-5 objects were presented across both the right and left visual fields, followed by a blank screen, and then followed by the same image with a slight change to one of the objects.
The aim was to measure when the change could or could not be detected.
What the researchers found was that the distribution of the objects across the visual field mattered as much as the number of objects presented in total.
When one side of the visual field was overloaded, the brain simply wasn’t able to process the information; it was lost immediately, like it never even made it to working memory.
From the researchers:
“But surprisingly, we found that monkeys, and by extension humans, do not have a general capacity in the brain,” says Miller. “Rather, they have two independent, smaller capacities in the right and left halves of the visual space. It was as if two separate brains – the two cerebral hemispheres – were looking at different halves of visual space.”
To clarify, these findings indicate that our working memory capacity doesn’t act like a single resource pool that we can draw from.
Rather, it is like two separate, smaller pools, and that these pools are associated with information presented in our right and left visual fields. You can pay attention to around four different things at once, but only if they are distributed evenly in your visual field.
Our brains can’t handle overload on one side or another, if one side gets overloaded, that information just gets lost, the other side can’t pick up the slack. For a long time, there has been debate over whether working memory works like a pool, or like a series of slots. The researchers think that their results prove that it is a little bit of both.
“Our study shows that both the slot and pool models are true,” says Miller. “The two hemispheres of the visual brain work like slots, but within each slot, it’s a pool. We also found that the bottleneck is not in the remembering, it is in the perceiving.” That is, when the capacity for each slot is exceeded, the information does not get encoded very well….
The conclusion of the study recommends optimizing the way in which we visualize our information to maximize our working memory –
“The fact that we have different capacities in each hemisphere implies that we should present information in a way that does not overtax one hemisphere while under-taxing the other,” explains Buschman. “For example, heads-up displays (transparent projections of information that a driver or pilot would normally need to look down at the dashboard to see) show a lot of data. Our results suggest that you want to put that information evenly on both sides of the visual field to maximize the amount of information that gets into the brain.”
So what is the application to trading?
I can admit that when i first started trading my charts were a plethora of rainbow colors, indicators, and flashing lights.
My mindset at the time was if 1 indicator was good then surely 2 must be better. Multiply that thought 3-4x and that’s what my charts looked like. The more the merrier right?
Today I strive to keep my charting indicators to a minimal with only the most critical of non-correlated indicators but I still occasionally fall into the trap of trying to layer on too much.
Interestingly many traders report that as their trading matures and evolves their charts become more and more minimalistic. So whether most mature traders realize it or not they’ve stumbled upon what works best – that is reducing the noise and clutter actually leads to better absorption and understanding of the information, and part of that is related to working memory.
So based upon the known limitations of working memory, ask yourself –
Popular science says we can hold up to 7 items in our working memory however that number is now considered less.
We are not automatons and there’s no point trying to pretend we are and drink out of a fire hose. So personally I find no more than 4 indicators to be my sweet spot.
Don’t try to jam everything into one screen. Use a multi-screen setup or a large monitor with a high resolution to evenly space your charts/indicators between your left and right field of vision.
Monitors are dropping in price every single day. So if you want to squeeze out an edge, invest in a proper trading rig and organize your trading space to maximize what you are able to absorb and keep within working memory.
The topic of chunking wasn’t one we took head on in this article but the idea behind chunking is the cognitive process of taking individual pieces of say a string of single digits “1”, “2”, “3” and organizing them into a single digit or chunk “123”.
So group like or related indicators to give your working memory the ability to chunk them into meaningful results that can be more easily remembered, retrieved, and understood.
Give these small changes a try and you might get some interesting results.
If you just can’t stand the thought of losing your indicators ask yourself truthfully what is the drawback in cutting out 1-2 indicators?
How minimal can I go and make that your goal.
We’d love to hear your feedback on this topic. Tell us in the comments if reducing the noise of your charts/screens has helped your trading.
Related Articles –
1. Does working memory training work? http://link.springer.
2. Working memory from an Investment perspective: http://folk.uio.
3. Working memory in regard to trade: http://tradersonline-
4. Working memory’s effect on an investor: http://blog.
5. Working memory and individual differences: http://www.