The magic number 4, short-term memory, and trading

Researchers have shown that there are clear limits on our ability to retain information in short-term memory (STM). The classic work on short-term memory retention focuses on seven plus or minus 2 as the number of pieces of information that can be retained by anyone. More recent research but still relatively old at 25 years, suggests that the magic number is actually lower, at 4. (See Nelson Cowan.) The overall conclusion is that the short-term memory for most is pretty low regardless of our training. You can get better, but there are natural limits for most individuals.

Are there ways around this memory problem? Yes, one of the systems used to get better memory is chunking or grouping together items to generate more STM storage.

The classic case for chunking is the following:
Try and remember, FBICBSIBMIRS. 
It is not easy.
Now try, FBI -  CBS -  IBM - IRS.
This is a lot easier. If we can condense and chunk, we can remember a lot more.

You can say that some technical systems are a form of chunking to offset the problem of short-term memory. Take the simplest case of price direction. We may not have to know the level of every market that we are long. We can chunk the data by just determining whether the price is above or below a trend. Instead of a long number with many digits, we can remember a chunk for (+). 

We can chunk four technical signals over a lot of fundamental information. A lot of rules-based investing is about condensing information to meet STM issues and store more information about many markets. Even if a computer can store more information, the investor has to process a set of comparisons. There are limits, so tools have to be developed to fight the natural limits of memory.