Trading is
all about decision making, (and ideally making more good decisions than poor
decisions) A large part of trading is about dealing with incomplete information
in a fast paced ambiguous environment and then managing those decisions towards
the best possible (good) outcome. I'm not just talking about entries, exits,
stops, or even money management. The above applies to ALL other aspects of
trading (& life in general) like market selection, trading research, setups
to explore or employ, retrospective analysis, psychological analysis and so on.
With the
abundance of decision making in trading or investing and the amazing human
ability to sabotage our decision making with psychological biases (here is a
great link about biases that I think ALL relate back to trading:http://io9.com/5974468/the-most-common-cognitive-biases-that-prevent-you-from-being-rational
, I think having a structured technique in the ole toolbox for good decision
making is not only highly useful, its down right necessary.
The main
goal & purpose of this post is to put forth & share the idea of using a
structured decision making technique, one that I'm borrowing from other fields,
to use in trading and to present an overview of the way I solve a problem &
how it's an effective decision making technique.
This is a
really powerful technique that allows you to quickly id the hidden reasons
behind a poor decision or trade. Usually the reason turns out to be, surprise
surprise, human error. The technique was originally developed and was used by
people smarter then myself at Toyota Motor during the development of its
manufacturing methodologies.
How you use
it:
-Look at the
problem & ask "Why" followed by "What caused this particular
problem"
-Usually,
the answer to the first "why" will lead you to another
"why" and the answer to the 2nd "why" will lead you to
another & so no
-Connect the
"whys" up to five times (thats why its called 5 whys strategy)
Below is
very practical & familiar example of the 5 whys put to use:
(Image from
http://www.educational-business-articles.com/5-whys.html)
So to bring
it all back around for us traders/system developers/investors, I challenge you
to do the following: take a look at your last 5 trades or decisions that were
not acceptable outcomes, & use this technique on those trades or decisions.
I now want you to look in your answers to those 5 why's & look for patterns
in the answers (Now the real purpose of this exercise will start to come to
light!) I think this is a great exercise for traders in particular because it
makes us look in the mirror & perhaps see the ugly things in our inner
psyche that just might be holding us back from becoming the trader we want to
be.
