Here, I’m going to cover the next 5 TRIZ Principles, as they relate to trading. There are 40 in all. You might want to glance at the Kick-off Article in this series, if you haven’t seen it, for further explanation. 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 11: Cushion in Advance
This is similar to principle 9 (prior counteraction). Here’s the difference: counteraction wards off failures, and helps keep something from failing. The advance cushion referred to here merely helps soften the blow when an unreliable part does fail. Examples in trading include:

• having a second internet access method, for when your service goes out.
• putting reliable secondary streams of income in place, to cushion down cycles in trading profits

Principle 12: Equipotentiality
This principle is essentially about getting rid of unnecessary movement and rearranging (either physical or mental). Think about the difference between a chest of drawers and a trunk. If you want something at the bottom of a trunk, you have to move around everything on top. In a chest of drawers, you just open the bottom drawer. Examples of equipotentiality in trading include:

• Moving to multiple desktops and/or screens, so you don’t have to work hard to see everything you need to at once. Using tabs inside windows can really help, here, too.
• Reading all your favorite trading blogs at once via RSS, rather than going to each site individually all the time.

Principle 13: Do it in Reverse
Perform the steps of a process in reverse, to realize some benefit. Examples in the trading arena include:

• the premier example is short selling, of course. Selling before you buy, to take advantage of downturns in stocks.
• Some days it’s easier to look for setups and then check the volume. Other days, it’s easier to check for volume, and then try to find a setup.

Principle 14: Spheroidality
This refers to replacing flat surfaces with curved ones, and hard edges with rounded ones. In trading, an example of this would be:

• Moving averages, and some technical patterns like cups and handles, smooth and round-out OHLC data.

Principle 15: Dynamicity
This principle involves allowing the design or characteristics of an object or process to change over time, rather than remain static. For some problems, change in real-time is the only way to optimize the solution. Examples in trading include:

• I prepare watchlists/rough trading plans every night, and then dynamically adjust them once trading starts.
• Taking new market conditions into account during trade management, vs just waiting for your stop loss to get hit.

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.

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.

I wasn’t there, but as far as I can tell, in the 1930’s and 1940’s, there was a big push to apply scientific principles to just about everything. Science was going to perfect every aspect of life. See books like The Mathematical Basis of the Arts, or New Musical Resources in the art/music world, for example (I’ve read both of those, and think they are very interesting). Think of studies that led to the 1948 book Sexual Behavior in the Human Male. There are examples everywhere, though many are becoming more obscure as time passes.

TRIZ
Around 1946, Genrich Altshuller started reviewing patents worldwide. The idea was to systematically uncover the essence of innovation, and distill it into principles that could be taught and applied across all fields of science and industry. 40 Inventive Principles were developed under the acronym TRIZ (a Russian acronym with English translation “Theory of Inventive Problem Solving”).

Using the principles is like this: imagine you are going through a cave, and find a big rock blocking your path. So, you pull out a checklist that says “Can you climb over it? Can you crawl under it? Can you move it? Can you drill through it? Can you find another path? etc.” It’s just a bunch of abstract ways people have solved problems in the past. As such, they make for an organized approach to make sure you’ve considered lots of typically good problem-solving angles. So, when you are trying to solve a problem, or make an improvement in something, you can read through the principles and see if any of them turn on any lights.

I’ve tried to use TRIZ before in my past life as a software developer, with some success. The principles are sufficiently abstract that, for me, they kind of spark ideas through free-association. You know, like that game where you hear a word and you say the first thing that comes to mind? For example, one of the principles is “Segmentation: Divide an object into independent parts. Make an object easy to assemble/dissasemble.” An example of this idea in trading might be candlestick charts, which break the day into time segments. Another might be dividing equity among different sectors for diversification. Of course, these are existing solutions–the goal is to be able to apply the principle of segmentation to new trading problems, or to the same problems in different ways (P&F charts, anyone?).

TRIZ and Trading
People have pre-tailored the TRIZ principles to specific fields, so that the wording and examples are immediately more relevant. A good place to look for that, and other TRIZ info is The TRIZ Journal, which is an active on-line journal of TRIZ-related articles. I found The 40 Inventive Principles of TRIZ Applied to Finance (pdf) there.

I thought it might be fun to try to run through the principles with more of a stock trading focus. Maybe I’ll make 4 posts of 10 principles each? I’m certain than when you all see the principles, you’ll immediately think of examples and insights that I didn’t. Post ‘em!