Here, I’m going to cover the second 5 of the 40 TRIZ Principles, as they relate to trading. You might want to glance at the Kick-off Article and First 5 Principles in this series, if you haven’t seen them. 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 6: Universality
Make something perform multiple functions, possibly eliminating the need for something else. Examples of universality at work in the trading world include:
- Many traders use fewer and fewer technical indicators over time. They use patterns in simple price action to get the same information.
- Using the same account balance to fund equity and futures and FX trading, as can be done with IB.
- Trading an ETF, rather than building positions in individual stocks.
Principle 7: Nesting
Put something inside something else, and possibly place that into a third thing.
Examples of nesting in the trading world include:
- Drilling down from 30 minute to 15 minute to 5 minute candlestick charts to investigate the “candles inside the candles.”
- Stock strategies such as: Daytrade a stock not for $ profit, but to build up a long-term position of “free” shares. This nests the daytrading activity inside the long-term trade.
Principle 8: Counterweight
To counter the weight of something, merge it with other objects that provide lift. “weight” can mean any abstract idea like “too big,” “too much,” “too often,” etc.
Examples of counterweights at work in the trading world include:
- Pair trading, where two positions are combined into a composite position. The positions often attempt to cancel out market drift (the effects of market drift were too strong, and needed a counterweight).
- I used to find that Trade-Ideas gave too many alerts, until I restricted it to my weekly stock screen (about 170 stocks, on average). This combination gave me a more manageable list to watch and trade against.
Principle 9: Prior Counteraction
Perform some counteraction in advance of an undesireable event.
Examples of prior counteraction at work in the trading world include:
- Putting a stop-loss in the market to protect against a move against your position.
- Some traders put support systems in place to keep them from breaking their rules (like automatically killing their trading platform at 1pm).
Principle 10: Prior Action
Perform, before necessary, a required step. The step can be fully or partially performed. This is very similar to principle 9. The only difference I can detect, is that these actions are part of the normal course of events, whereas principle 9’s counteractions are to prevent bad or abnormal things from happening. Examples include:
- I have a pre-computed table of share-sizes vs. stop width, for the amount of money I want to risk. This keeps me from having to work out my share size during the heat of the moment.Some trading platforms allow you to algorithmically manage open trades. So, you can program your trade management strategy ahead of time (like, when to move your stop to break-even, etc), and not have to worry about it during each trade.
