5 Things An FBI Agent Can Teach You About Trading

book coverI’ve mentioned in the past that I don’t usually read trading related books and, instead, prefer to read things that I find of general interest. I started doing this because I found a lot of newer trading related books to be disappointing. There are probably only a handful that I would recommend but there are many other books that I think have helped me more with trading – and they have absolutely nothing to do with the topic!

I believe in transferable skills (general skills that can be applied to other industries) and have used lessons that I’ve learned from books on things such as psychology, business and even bodybuilding to improve my trading ability.

One book that I’ve just finished reading is What Every BODY Is Saying: An Ex-FBI Agent’s Guide to Speed-Reading People by Joe Navarro with Marvin Karlins Ph.D.

This was a really enjoyable read and gave many insights into body language with real life examples that I’ve never seen anywhere else. Here are 5 facts from the book that can be applied to trading:

1. Patterns are everywhere and also nowhere

DAX SYM TRII find patterns to be one of the most interesting things on earth. I’m not talking just about chart patterns but patterns in behaviour, nature, business models and even design – they are literally everywhere but if you do not notice them then they are also nowhere. Body language experts such as Navarro will see a suspect and notice everything about his/her body – facial expressions, gestures, “tells” from the way someone is sitting and even how they use their hands and position their feet. They use this information to read someone’s intentions and find out if they are concealing the truth. On the other hand, a normal person may look at the same suspect and not notice anything unusual at all.

If you’ve been reading this blog for any amount of time then you’ll be aware that my trading is based on recognising recurring price patterns. Patterns are only useful if you can identify them and it’s not uncommon for ten traders to look at the same chart on the same timeframe and to find that each of them entered and exited the market at differently.

The key is that you must have rules to identify patterns so that you avoid misidentification. Your definition of a pattern such as a double bottom may be different from somebody else’s but that’s OK as long as YOU can use that information effectively.

2. Context adds meaning to patterns

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Gestures mean different things in different cultures and even in different situations. For example, a thumbs up gesture may be a positive sign for approval in western culture but in some parts of Asia it is actually used as an insult. Expressions, gestures or movements by themselves are not enough evidence to draw conclusions as the context that they are used determines their validity and meaning. In trading, the context of a pattern (where it occurs and why it could be occurring) should also be assessed if you want to improve your win rate. Context can be gained from analysing significant surrounding areas or structures and also longer term trends.

I used to trade every valid pattern and, while still profitable overall, I found it to be mentally exhausting because most of them would fail (around 45% win rate). I decided to explore the common factors of patterns that produced winning trades and ended up improving my win rate by over 15%. I realised that context may be more of a reason to enter a trade than the clarity of the pattern itself.

3. Establish a Baseline

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Along with recognising patterns and applying them to context, Navarro and other body language experts establish a baseline for each individual they are analysing. A baseline is the what is “normal behaviour” for that person. This can be done by watching how they react under normal circumstances such as what they do during a normal conversation, or how they respond when you ask a question where you know they are telling the truth. For example, Navarro could be questioning a suspect and ask them innocent questions about their birth place and education where they would tell the truth and then eventually ask the suspect questions related to the crime scene to see if there were any shifts in body language. He is trying to establish what someone does when they are telling the truth and then use that as baseline or marker for other questions.

This same concept can be applied to the markets and it’s something that I use every day when trading. If you want to have a high win rate then you need to understand what is normal market behaviour and, more importantly, when and why your trades work.

I’ve not written about intraday baselines or points of control  in detail before (I think I’ve only briefly in one of the “trade of the week” analyses once) but it is something that I’ve been using for a while now and something that I think is very important for the identification of trades and large movements particularly in the afternoon session. If price fails at the same area a few times in a row then you can be sure that the area has some type of significance and become a potential area for a trade.

4. There are many methods

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What Every BODY is saying is an extremely detailed book with many examples of body language patterns. The book explains each section of the body from head to toe and what they could be subconsciously saying – from facial expressions to smaller details such as hands and even things hidden under tables such as feet (i.e. sitting posture, the direction at which the toes point, etc).

One thing that I’ve always had is an appreciation for other ways traders approach the markets and I enjoy learning about how others trade even if it’s a market or method that I would not use myself. I think it’s important to be open minded in trading because even if I do not trade exactly the same as Trader B, there may still be something that I can learn from him.

5. Everybody can see the signs

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Body language patterns are universal – everybody uses them because they are part of human nature and an extension of self expression. When we experience joy most of us will raise our arms (i.e. A sprinter winning a race) and when we experience loss we drop our heads (i.e. A losing football team leaving the field). Some of these signs may be subtle or extravagant but anyone who is looking for them should be able to see them – whether they use that information is another separate matter.

How does this relate to trading? A good pattern for trading is one that you can explain to someone else and they should also be able to spot it even if they know nothing about trading. Only after you have the definition of the pattern down can you think about ways to increase it’s risk reward or win rate otherwise you are trying to shoot a moving target (or worse, one that keeps changing shape).

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