5 Why's

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.

http://www.isixsigma.com/tools-templates/cause-effect/determine-root-cause-5-whys/

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.