Trading and the Placebo Effect

Helenqu

Established member
841 3
Hi all,

Had a sudden rush of lateral thinking last night, bringing together a few disparate thoughts to produce a theory.

In medicine the placebo effect is a measurable, observable, or felt improvement in health not attributable to treatment. Studies place 50-70% of treament effectiveness on the placebo effect. Strangely little red pills produce the greatest placebo effects of all.

Recalling that, set me to thinking about whether such an effect exists in trading. I think it probably does. How often do you come up with a new strategy/plan that "seems" to work well for a while and then stops being effective? Could this be one of the reasons why so many of us flit like butterflies from strategy to strategy rather than settling and really working hard to perfect just one?

Discuss :)
 

Trader333

Moderator
8,612 939
Placebo Control

Hi Helen,

I would guess one way of checking this would be to use a random entry into a market and comparing the results against the strategy in use. It is also possible to backtest strategies automatically if you have enough data available. This is useful as it allows you to determine maximum drawdowns, percentage of profitable trades, average win value versus average lose values etc. I have done this using Tradeststion which is pretty good for that sort of thing. I am sure there are other ways or software that can do this and I have always found it a useful tool.

Cheers


Paul
 

ChartMan

Legendary member
5,580 46
Aha! Very interesting... I have often thought about the effectiveness of trading just support and resistance trend lines on the price action..... In hindsight, it's very effective, like alot of other strategies....
 

farzin

Junior member
17 0
Well It is true (at least on my case) changing strategies time to time. But don't you think it is normal in every market? If there is only one strategy which works, so would be any market at all? I think one of the most important reasons is change in fundamentals. I also believe the art of trading is to recognize new patterns and exercise your knowledge of technical or fundamental to these new pattern and stop it before it is known to everyone.
 

Austin_Clone

Junior member
26 0
Hi Helen,

I think the effect is valid. When we have something new, we tend to follow the directions more closely, whether it be the new juicer or the new trading system.

After it becomes familiar to us, we tend to get relaxed and "bend" the rules a bit. So, in a matter of weeks we're not only putting "forbidden fruit" into the juicer, but we're taking trades which are against the system.

Then, we're at odds as to why that wonderful juicer doesn't work after ingesting a few dozen coconuts or our trading system no longer produces the same results as before.

Of course, the solution is: A bigger, more powerful juicer, and a bigger, more powerful trading system!

Unless we are cognisant of the sabotage we're committing, the cycle will continue ad infinitum.
 

warm_machine

Member
70 0
Quite often the strategy itself may be at fault - it may have worked the first few times by pure chance and the variables that you believed were affecting the price action are not in the end reseponsible. This is of course were back-testing holds the key and ought to be a must for those taking the directional/momentum trading path.
 

Helenqu

Established member
841 3
Actually guys I wasn't really talking about backtesting etc. It was more about ones feeling about a strategy you might have developed, maybe even though extensive backtesting.

The strategy is like the placebo pill, it appears to work and you feel good but then as the faith/euphoria/heightened awareness reduces, small niggles and doubts appear. You then begin to look for the next pill/strategic fix :)

My own belief is that most strategies will work if you consistently follow them and use effective money management.

Simple strategies are easier to follow consitently (ie Trend Support, Resistance) so appear to be the most effective. But I do think that a large percentage of traders/would be traders never settle down long enough with any system to find that consistency. If that happens, trading becomes a roller coaster of alternating hope and despondency instead of a steady climb up a learning curve.
 

neil

Legendary member
5,167 747
Familiarity breeds?

I think Austin has hit the nail on the head. For placebo read familiarity. You then second guess your system or tinker without realising you are doing it. Result, chaos.

Thats why "trading in the zone" recommends trying to trade a system mechanically and coldly 20 times in a row. To show you how difficult it is to trade without emotion. It's emotion that destroys the placebo.

I think....


:)
 

ivorm

Well-known member
293 1
Hi Helen,

>>My own belief is that most strategies will work if you consistently follow them and use effective money management. <<

I think you're absolutely right. I've been guilty in the past of switching from one strategy to another . Recently, however, I made a decision to stick to one tried-and-trusted system.. The result has been better and more consistent trading, combined with a more peaceful state of mind because I'm not constantly asking myself if there's a better method arouund. (I'm not being complacent about my system, and I'll still look at other startegies, it's just that I don't feel the need to be constantly searching for the 'holy grail').

I think part of the 'chopping-and-changing' problem is that trading attracts people who (1) like tinkering around with systems, and (2) like playing with computers. For that sort of person, (and I am most definitely one), it's kindof hard to resist the temptation to constantly try out new 'toys' ( read 'strategies').
 

cassiopeia

Active member
133 2
Hi Helen

Interesting theory.

There may be a difference though, since medical placebo's are there to establish (along with the treatment results) how much can and cannot be attributed to the direct effect of the treatment. Placebos are not strictly a measure of how much you imagine you feel better since the power of the mind can really make you better, also placebo's will pick up genuine long term remission effects. Say if you applied a placebo to homeopathy for example I think in many cases you would find people have genuinely recovered from the illness even though the treatment had no direct effect.

In the case of trading or investment strategies I think people 'con' themselves into a false strategy due to limited back-testing or data-mining, both which can be demonstrated to be statistically invalid. As a result they may temporarily have some success due to chance but it will eventually fail since the strategy really doesn't work. In contrast with medicine the beneficial power of you believing your strategy works really doesn't help at all, neither is it likely to start working for any other reason.

I suppose where the similarity arises with medical illnesses is where you get short term remission effects which is common with chronic conditions. This falsely gets attributed to the effect of the treatment, but just like unsound trading strategies this happens purely due to chance and in the long run it really doesn't work.

(PS Thought I could do with some new scenery, hope you don't mind me following you around!) ;)
 

Helenqu

Established member
841 3
Hi Cass,

Delighted to see you over here :) Draw up a chair (or should that be settle down in your dog basket?) and make yourself at home.
 

Les Carlin

Member
58 0
In medicine the placebo effect is a measurable, observable, or felt improvement in health not attributable to treatment. Studies place 50-70% of treament effectiveness on the placebo effect. Strangely little red pills produce the greatest placebo effects of all.

Recalling that, set me to thinking about whether such an effect exists in trading.

I've tried to follow this thread, but i'm having trouble with your premise. The placebo effect occurs because the person BELIEVES the placebo pill is the real thing. Quite how and why such a belief is converted into physical changes in the body is currently a topic being researched and thought about. But what's the connection to trading here?

You may have a belief about which strategy works, but only once you research it you will decide whether to use it to construct your trade plans. The placebo effect works without the patient having to verify whether the pill they're taking is the real thing or not. The mechanisms that mediate this process must be the mind-body interface and thus outside conscious control.

Not so with trading. Use a trading plan outside of your conscious control and you will soon be reflecting on the state of your capital account! For that reason we [should!] have researched the strategy behind the trade plan, thus placing it within our control

IOW, i don't think there is a parallel here between placebo and trading - one occurs without awareness, the other hopefully with.

Now mebbe i'm missing something here and if so, please enlighten.

Les
 
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Helenqu

Established member
841 3
Hi Les :)

You found me.

"i don't think there is a parallel here between placebo and trading - one occurs without awareness, the other hopefully with"

Ideally yes. Perhaps I was thinking more of people starting out. Who buy strategies off the shelf, or out of books. They start with a belief that the thing works, cos someone has told them it does (as one would with a placebo treatment) but find out that it isn't effective over a period of time, as people on placebo treatments do.


It was an idle thought that provoked a response.


BTW did you get my mail re July?
 

Les Carlin

Member
58 0
BTW did you get my mail re July?


Hi Helen,

Yes i did. That's ok and thanks for the 75 minute slot. Been out of circulation for a bit - due to family computer problems. Just built a new system for my daughter of which i'm dead proud. Gives me an outlet for my gadjet mania and keeps the testosterone vaguely under control.

:)
 

Les Carlin

Member
58 0
They start with a belief that the thing works, cos someone has told them it does (as one would with a placebo treatment) but find out that it isn't effective over a period of time, as people on placebo treatments do.

Um that's my point really. Placebo efffects DO work over time and frequently just as well as the the real thing. The mystery is why. But not so with trading. One quickly has to adjust one's belief. I think the real difference is probably that an individual's belief can have a dramatic effect on one's personal physiology, but not on an entire market.

:D
 
 
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