Reality Isn’t Gray

Trader's Mindset

Dec 17

Brief detour, it is known that objects do not have a physical property of “color”– that color does not exist in the physical external world. Yes, there are light waves which produce the sensation of color according to their frequency and act predictably according to known physical laws. But, the feeling thereof is created by the brain. Sure, it is reasonable to assume most people experience color in a similar fashion because we have similar brains. However, the accepted view in science is that color is a “qualia” created by the brain.

On learning this, one might imagine then that the reality is “gray”. However, there is no gray either–more specifically the sensation thereof is also a qualia! In fact, anything we can experience is a qualia. However, it must certainly objectively exist to be experienced– which is separate and distinct from the light waves. As for the answer of what qualia is, that question deals with fundamental of consciousness, which no one understands, it may be maximally compressed form of multi-dimensional information in the most natural state or perhaps a form of non-compressible / non-computational information.

As for what this may have to do with trading, it gets to the matter of reality. There are any number of ideas that we might trade on– instincts, feelings, or observations. Sometimes the impression can be verified on a statistical basis but other types of analysis may be less statistical in nature: the challenge is to be able to incorporate uncertain information into a rational decision making process.

Because if we accept that there is always some uncertainty to any evidence then we can incorporate any information if we have a rational and accurate hierarchy for weighting and ranking its uncertainty. The troubled mind who hears voices and does crazy things is not so much crazy because they hear voices but because they do not engage a rational process for dismissing the nonsensical.

The inverse may explain how some traders can trade on any random idea successfully– they do have a way of more or less accurately ranking and weighting for the uncertainties of different types of information. The amplification process for the discretionary trader is skill of consecutively and hierarchically ranking uncertainties while the systematic trader follows a rigorous backtesting process for dealing with uncertainty. The discretionary trader may utilize an OODA loop to continually update their understanding.

One might concretely seek to create an uncertainty factor for each component in a multi-factor system or as part of a discretionary decision making process. As for how such a factor could be made to meaningfully incorporate and differ from the amplitude of the signal— that’s a good question. The idea of uncertainty leads one to first thought that the distribution– or the range the variable could take– might be relevant.

Another way of implementing the concept, if we don’t know the distribution, is to use Bayesian reasoning and try to integrate the concept of priors into our work.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at