Outside of my day job as a software development manager, I’m a self-taught, independent systems trader. During the course of my trading education, I stumbled upon a presentation from Michail Shadkin, a professional gambler turned trader.
Michail is a strong believer in “The Power of Observation”. Starting in his days as a professional gambler, he would look for “tells,” or mannerisms and tendencies other players exhibited. By watching for these tells, he tipped the odds in his favor. He carried this over to his trading career, where he spends hours each day carefully observing and researching the financial markets, looking for patterns or anomalies which might similarly give him a trading edge. He explains this concept in part 1 of his 4-part presentation.
To reach his peak potential, Michail also combined observation with numerous other important trading disciplines and skills, such as:
- Understanding his own psychology
- Understanding the psychology of other market participants and “punishing stupidity”
- Not being a “piker,” or someone who only places small bets and doesn’t scale up when the odds are in their favor
In this regard, observation is essentially part of Michail’s “talent stack.”[1] By itself, observation is a seemingly ordinary skill. However, combining it with other skills and disciplines results in something quite valuable. When the odds are in his favor, he has a high level of confidence to aggressively increase his position size and “send it home!.”
Using Observation with My Own Trading
When I first listened to Michails presentation in 2016, I was at a crossroads. I had read many trading books, and was comfortable with the workflow of managing a trading account. As a software developer, I even wrote some programs to backtest my own strategies. Unfortunately, despite spending hundreds of hours learning how to trade, I was at best breaking even. [2] I was very frustrated, and felt it was time to either give it up altogether or dramatically change course.
Coming from a software development background, I was primarily using “data mining” techniques to look for profitable strategies. I downloaded quotes into the software I had written and would backtest with many different strategies and technical indicators. While some traders may be profitable with this type of bottom-up approach, I could never make it work for me.
Focusing on observation and some of Michail’s other recommendations represented a pivot point and breakthrough in my own development and performance. I’ve since adopted a decidedly more holistic and top-down approach and have been consistently profitable ever since.
Leveraging Observation in Other Situations
Michail Shadkin first used observation to gain an advantage as a professional gambler. He then transferred that skill to day-trading. I successfully took what I learned and applied it to my own style of trading, which is on a much longer timeframe and uses a completely different system.
Over time, I’ve come to appreciate observational skills as being applicable to almost every aspect of my professional and personal life. My experience is not unique, since business leaders, investors, and photographers have also recognized the importance of observation. I’ve used observation more and more in my business career as a manager, and in my personal life as follows:
Job Interviews: As a hiring manager, I regularly conduct job interviews for positions on my team. Since the work my team does is very technical, many of the interview questions are technical in nature. However, I’ve found I can often learn more about candidates by carefully observing their tendencies and behavior outside of the technical portion of the interview; e.g.:
- Do they show up on time? Does this indicate they may be late and unprepared for the job itself?
- Did they dress appropriately? For a senior level, customer-facing position, a T-shirt or baseball cap may not be appropriate.
- Do they take the time to complete the short take-home assessment we give them in advance of the first interview? Are the results of the take-home assessment consistent with the in-person technical interview?
- Are they cool under pressure or do they get flustered when asked certain questions?
- How is the candidate’s overall temperament? Would this person be a good fit for the team? Is this the type of person I’d want to work with everyday?
- Is the candidate verbalizing the solution to the problem? Are there long pauses between questions and answers?
Managing projects: I’m always keeping a close eye on the process and techniques I use with my team and how I work with customers. If I see a definitive pattern of something causing a positive outcome, I’ll use it on other projects or with other customers. Over time, this results in continuous improvement.
Personal Safety and Self Defense: This is actually a poignant example where being observant can mean the difference between life and death. When I was in college, I took martial arts training for about 3 years. Outside of the normal physical training, the instructor emphasized being acutely aware of your surroundings. By observing and recognizing potentially dangerous situations, you can respond by de-escalating, taking a more defensive posture, and/or removing yourself from the situation altogether. Similar to the job interview example above, these are the types of questions I ask myself when I’m out and about in various public settings:
- Is something out of place here? Why is this guy wearing a trenchcoat in the middle of the summer? Why is there an unfamiliar car lurking in my neighborhood?
- Does the person next to me look intoxicated or otherwise potentially dangerous? Is he sweating profusely, being verbally combative, or otherwise behaving erratically?
- Is this a situation which could easily escalate into something very dangerous, such as a fist fight at a bar or concert? Is it time to remove myself from this situation?
How to Focus Your Attention
It can be overwhelming to try and focus your attention on too many things at once. It may be difficult to separate the signals from noise; signals represent meaningful information which has a definitive impact on the outcome you are seeking, but noise is just a distraction. A few techniques I’ve found to focus on the right signals include the following:
- Use a “second set of eyes” to focus on different things at the same time: For the job interview scenario described above, another manager and I pair up and do panel-style interviews. He focuses more on the technical parts of the interview, while I mostly listen and ask follow-on questions. After the interview, we meet and compare notes. We’ve found we complement each other and can more fully assess a candidate in a single interview.
- Focus on the most important things first: I’m a big proponent of the Pareto Principle, which asserts that approximately 80 percent of outcomes are caused by 20 percent of the causes. In my trading, for example, I focus on parts of a system which have the most impact on my performance; among other things, this could be position size, psychology, or risk/reward ratio.
- Observational Questions: For each situation or process being observed, developing a set of questions to ask yourself or others will help to structure the observation and appropriately focus your attention. For the job interview example given above, the questions help to identify mannerisms and tendencies pertaining to the job itself. Besides specific observation questions, some of these more general questions are relevant to almost any setting:
- Is the event I just witnessed part of a larger pattern, or is it just an isolated occurrence?
- Does something look out of place in this situation?
- Is one performance indicator I’m following diverge from another, or is there confluence/agreement?
When I first started trading, I leveraged many technical indicators, and traded in numerous different asset classes and timeframes. Over time, I’ve narrowed my focus and basically found my niche. When I’ve gained confidence and experience in other endeavors, I also begin to trust my instincts and focus on a few important things.
Tools and Techniques to Help With Observation
Arguably, the most important thing about observation is to keep your eyes and ears open, so you can find signals and patterns to gain an advantage and continuously improve. I’ve also found it useful to leverage some specific tools and techniques to further enhance the whole observation process.
Journaling: Whether you use pen and paper, note-taking software or a dedicated app, journaling is a good way to capture your observations over time. To support my trading, I purchased an iPhone app called Day One. Over seven years, I’ve written more than 2,000 entries in my trading journal. Most of these entries are unstructured and informal. I mostly just capture things I’ve observed and may want to do a little follow-up research on. About once per month, I also go back and review my recent entries. If I see something more than once, it might also represent a pattern warranting further analysis.
Tracking Spreadsheets: When the situation or process being observed is relatively structured, spreadsheets are a great way to capture and summarize some raw data. Based upon what is being observed, spreadsheets are flexible in the way they are set up. In my current role, the management team maintains a simple tracking spreadsheet for the recruiting funnel. Over time, some patterns have emerged and we’ve used this knowledge to make some adjustments to the recruiting process. I also maintain numerous tracking sheets for my trading; each is customized to the system being traded and the relevant performance metrics. With spreadsheets, once you’ve collected some raw data, it’s straightforward to create pivot tables or charts and graphs to further analyze the data and help identify patterns.
Pen and Paper: Depending on the setting, pen and paper may be more appropriate than journaling or taking notes on a computer or mobile phone. For example, during in-person interviews or other 1:1 meetings, I find pen and paper to be less impersonal than typing notes on my laptop. When I’m not working or near my computer, pen and paper is the also best way to capture notes.
Don’t Forget, You’re Being Watched Too!
One final thing to consider is the most observant people around you are also watching you! At work, this could be your manager, your team members, or anyone else you work with. It suffices to say you should be mindful of how you project yourself. Losing your temper or taking an unprofessional tone in a chat or email thread wouldn’t send the best signal to those around you.
Summary and Conclusions
Prior to listening to Michail’s presentation, I had a basic appreciation for the importance of being observant, being a good listener, having “situational awareness” and other soft skills pertaining to observation. However, Michail takes it to another level and places a primary importance on direct observation to gain a unique and sustainable advantage or edge.
The various examples above show how observation is universally applicable and can be leveraged in almost any situation. In situations involving other people, you can look for relevant tells, or mannerisms and tendencies. Any business process can also be observed to identify events which may be an anomaly or part of a larger pattern or trend.
When you add observation to your talent stack and combine it with other complementary skills and talents, it will most definitely improve your performance and give you an edge. In much the same way Michail carefully watches for “tells” in other poker players, or patterns in the financial markets, you can do the same to gain an advantage or continuously improve many aspects of your personal and professional life.
In general, observation is a skill that is definitely worth developing. To the extent it’s a skill almost anyone can learn and it can be leveraged in very powerful ways, it is definitely worth your time to hone this skill.
Footnotes
[1] The term “talent stack” originated (or was at least popularized by) Scott Adams, the creator of the Dilbert cartoon series. In the following YouTube video, he explains how he combined a set of ordinary skills to create something quite valuable: Dilbert Creator Scott Adams Reveals His Success Formula
[2] My own experience learning how to trade is consistent with the following video, which describes the 8 stages of a trader’s development. Stage 3 is the break even stage: The 8 Stages Most Traders Go Through Before Becoming Profitable
About the Author: Steve Roehling is a professional systems developer and software engineer. Trading systems development is one of his research and development interests, encompassing both the technical aspects of systems development and human factors such as psychology. The views expressed herein are those of the author, not necessarily those of his employer.