Innovative Trading through TRIZ, Principles 1 - 5

Here, I’m going to cover the first 5 of the 40 TRIZ Principles, as they relate to trading. You might want to glance at the Kick-off Article on this series, if you haven’t seen it. Basically, these are principles derived from an international study of patents. The idea is to isolate the foundations of innovative ideas, which can be applied to any creative endeavor.

These principles, and the examples from trading below, are meant to get the mental juices flowing. The idea is to apply these principles to new problems. When you think about how to improve your trade execution, or your trading system, or the way you track your performance, or whatever else, you can read through the principles and see what kind of ideas emerge.

Perhaps some of you will read these and immediately think of other trading-related examples of these notions. If so, don’t be shy! Post it in a comment. The more the better, and there are no wrong answers. If the description makes you think of it, then it is TRIZ at work, and it is always correct. Let’s get started!

Principle 1: Segmentation
Segmentation is the notion of dividing an object into independent parts. It can mean re-use of parts through modularity. It can mean making an object easier to understand, one part at a time. It can mean making an object easier to assemble or disassemble.

So where do we see segmentation applied to stock trading? Let’s see…

• Price action is often segmented by units of time, as in bar charts or candlestick charts.
• Some traders break the trading day into zones of activity (like the opening, morning reversal, lunchtime lull, etc.).
• Traders divide the universe of stocks into sectors. This makes it easy to see the markets from an overview perspective.
• Some traders divide their workspace up among multiple monitors, whether real or virtual.
• Some traders divide time up on several levels to monitor and review their performance. For instance, I do weekly and monthly reviews of my trading.
• Some traders divide a trade into pre-trade and post-entry time frames, and operate under different rules for each. For instance, some traders advise that one should always choose a stop and a price target prior to entering the trade.

Principle 2: Extraction
Extraction means separating out interfering parts of a system, singling out the necessary parts of a system.

Examples of extraction in a stock trading context include:

• Traders make use of technical indicators. These single out specific properties of the price and volume action.
• Traders compare trades by R multiples. This separates the quality of the trade from the size and overhead of the trade. It makes comparing trades accross different accounts possible.
• Many traders use slow charts to zero in on the overall price direction, and eliminate unwanted fast chart noise.

Principle 3: Local Quality
Local Quality refers to changing something about a system that is uniform, in such a way that makes it non-uniform.

We see examples of local quality in the trading world in situations like these:

• A trader moves from trading only stocks, to also trading options or futures.
• A trader uses equivolume charts, which differ from bar charts by using volume to feed non-uniform bar width.
• Many traders risk a percent of their equity on their trades, an amount which changes with their account size. Compare this to risking a fixed, uniform amount per trade.
• Some traders switch from linear chart axes to logarithmic ones. Each inch on the chart is a non-uniform dollar amount, but it helps them see moves by percentage more easily.

Principle 4: Asymmetry
Asymmetry is subtly different from Local Quality. It’s about changing the shape of something from symmetrical to asymmetrical.

Examples of chosing asymmetric ideas over symmetric ones:

• Traders choose trades with a potential reward larger than the expected risk. Thus, their exit point is further from the entry price than their stop loss. It’s an asymmetric exit strategy.
• Traders using options strategies often put on combinations of put and call positions that have asymmetric payoffs on the long and short side.
• Some trading systems with rules for long trades simply invert their rules to create short signals. Others adjust or add rules for their short signals. This customization is an example of moving from a symmetric system to an asymmetric one.

Principle 5: Consolidation
No, not price consolidation, like you’re used to. In TRIZ terms, consolidation refers to making operations contiguous or parallel in time.

Examples of consolidation from the trading world are:

• Platforms that support order-cancels-order options on orders. This eliminates manual and time-consuming steps that a trader would otherwis need to take.
• Traders set alerts on stocks that allows them to monitor more stocks in parallel than they could manually.
• Traders create macros and hot-keys on their platforms, which allow them to issue commands faster than they could otherwise.