Trading And The Law Of Entropy 11 July 2017
It was after a long time that I came upon a book of John Ehlers in my own library. The only thing about Ehlers books that I remember is ‘maximum entropy’ and it kind of stuck in my memory because back then I didn’t have a clue what it meant. I don’t know what made me cotton on to these words, perhaps the fact that they sounded completely alien to most normal humans! So when I spotted an Ehlers book and law (he is a brilliant chap and all that but quite for the more scientifically inclined folks only), I was once again reminded of the former buzzword. But over the years, I have come to understand quite a bit about entropy. For the uninitiated, entropy is a kind of measure of disorder. I began understanding the word better ever since I began researching market moves- which we essentially consider as being disorderly. To put simply, a trended market has low entropy while a ranging market can have high entropy.
Why should this word matter, you might wonder? For one, it is the law of the universe that left to itself, entropy increases thru time. This means that thru life disorder always increases. Now, there are so many things that keep happening in life that you don’t usually notice the impact of entropy except for a feeling that, somehow, life is just not getting better despite your wanting it to! But for traders, entropy is dangerous. As most traders struggle to get into profitability, time keeps passing by. People try various approaches in the hope of getting it right but seldom do. This is where entropy catches up. As time extends, the impact of entropy makes the trader’s life more chaotic and disorderly and he soon reaches a point where he inevitably concludes, erroneously of course, that there is no money to be made in trading.
However, before you despair, let me hasten to add that you can fight back against the pull of entropy. It is possible for everyone to beat disorder- like solving a scattered puzzle or cleaning your messy room or organizing individuals into a cohesive team in your office etc. But because the universe naturally slides toward disorder, you have to expend energy to create stability, structure, and simplicity. Anything that is successful- relationships, clean surroundings, tidy rooms in a house, strong teams etc. require care and attention or cleaning and maintenance or communication and collaboration. Without effort, things will decay.
It is the same with trading. Markets are no doubt chaotic but we must exert effort to create useful types of order that are resilient enough to withstand the unrelenting pull of entropy. This occurs in the form of definite fixed ways of entering, set ways of managing risks and planned ways of exiting trades. Maintaining organization in the face of chaos is not easy. In the words of Yvon Chouinard, the founder of Patagonia, “The hardest thing in the world is to simplify your life because everything is pulling you to be more and more complex.” With information bombardment going on all around us, useless activity abounding from everyone we know and meet, it becomes more and more difficult to handle, without the creation of a proper way of handling it all. So even for the external environment of information we need to have a method of processing. Disorder can occur in a variety of ways. But order has to be imposed using a few definite ways. That is our own responsibility. Markets don’t pose difficulties because the planets are misaligned law or some karmic faults exist It is simply entropy at work. Chaos exists in the market. It is up to us to find and then impose upon ourselves some order.
All of us have some talents within us. But are these directed in a manner that can benefit us in what we desire in the market? If there is a mismatch, are we fixing that? Hardly anyone is fixed up right for the market from the beginning- we all have to find our way in it, cut paths for ourselves etc. Knowing this, you must take it upon yourself to design your ideal trading lifestyle. You have to turn a mismatch condition into a well-matched one. Optimal lives are designed, not discovered.