Approaching trading as a High Reliability Organization (HRO)

Logo of the United States National Wildfire Coordinating Group. (Photo credit: Wikipedia)

We know from scholarly and popular literature that 90% of new businesses fail in the first five years as an additional 90% fill in the next five years and yet there are groups of organizations that are remarkably successful while operating the most difficult of circumstances when you would expect failure to be the norm. These organizations which thrive in high risk, high uncertainty environments in which failure is catastrophic are collectively known as high reliability organizations (HRO). Scholars have taken a number of different approaches to the subject of HR role in the literature. They have approached it from the disciplines as diverse as: neuropsychology, civil engineering, organizational psychology, sociology, naval aviation and nuclear propulsion.

My own research on decision-making under conditions of uncertainty led me to the scholarly literature on high reliability organizations(HRO) through the approach of social psychology where the two most influential writers are Weick and Sutcliffe from the University of Michigan. They had identified five qualities of HR role that lead to exceptional outperformance and the development of organizational resiliency. Resiliency is an important topic for traders because it describes strategies and resources that help the trader endure through emotionally challenging and training times. Because traders operate under high stress and uncertain conditions all the time, it occurred to me that perhaps the principles of HRO might have some pay off for traders. I was happy to find the important connections that can be of benefit to traders in developing  robust trading plans and emotional resilience.

Weick and Sutcliffe identify five qualities of HRO’s which distinguish them from traditional organizations which traders might seek to develop in their own trading plans:

1) Preoccupation with failure: To avoid failure we must look for it and be sensitive to early signs of failure; not to lay blame but to ensure the plan does not further unravel

2) Reluctance to simplify: Labels and clichés can stop one from looking further into the events; consider the evidence for your beliefs carefully and don’t oversimplify.

3) Sensitivity to operations: Systems  by nature are dynamic and nonlinear; it can be hard to know how the different pieces fit together and how quickly things may change.

4) Commitment to resilience: you must be able to perform during periods of high stress. This means you have to be able to absorb strain,, recover from difficult situations, and then learn and grow from previous episodes.

5) Deference to expertise: This means respecting the evidence of the results and having confidence in the quality of your justified conclusions. These are more important than platitudes and conventional wisdom.

Firefighters are an example of an HRO  in practice that traders can learn a lot from. The National Wildfire Coordinating Group (NWCG) has developed a set of 10 Standard  Fire Orders, which are a logically organized set of rules that have been keeping  firefighters alive and successful in their mission since 1957. They are to be implemented systematically and applied to all fire situations.  They also have identified 18 watch out situations that represent known conditions of especially high risk. These apply equally well to traders as I tried to show below.

Professional Trader Behavior (adapted from the NWCG: http://www.nifc.gov/safety/safety_10ord_18sit.html)

1. Keep informed on market conditions and forecasts.

2. Know what your market and target are doing at all times.

3. Base all actions on current and expected behavior of the market and target.

Market Safety

4. Identify escape routes and safety zones and make them known.

5. Post lookouts when there is possible danger.

6. Be alert. Keep calm. Think clearly. Act decisively.

Organizational Control

7. Maintain prompt communications with your brokers, partners in the market.

8. Give clear instructions and insure they are understood.

9. Maintain control of your trades, orders and decisions at all times.

If 1-9 are considered, then…

10. Trade the market aggressively, having provided for safety first.

The 10 Standard Orders are firm. We don’t break them; we don’t bend them. All traders have the right to a safe environment is.

The 18 Watch Out Situations

1. The market and your target not scouted and sized up.

2. You haven’t planned for or rehearsed this situation.

3. Safety zones and escape routes (protective stops) not identified.

4. Unfamiliar with market and sector factors influencing price behavior

5. Uninformed on strategy, tactics, and hazards.

6. Instructions and assignments not clear.

7. No communication link between traders, brokers and partners

8. Entering trades without predetermined exit points

9. Trading without stops.

10. Chasing a runaway breakout

11. Not being aware of critical states

12. Unaware of broader market condition.

13. Unaware of potential market turning points

14. Price range begins to expand in short term time frame.

15. Change in broad market volatility.

16. Ignoring signals of changing market conditions.

17. Difficult to judge where to play safety stop.

18. Feelings of physical, mental or emotional fatigue.

Note that these are just my own quick interpretations; yours might vary. The exercise in translating from firefighter perspective to that of a trader is definitely worth doing on your own as well. Give it a try!

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Spectacular comments from Bill Clinton:

Does he really have such lack of self-awareness? I guess he is used to the critical thinking skills of his Democrat followers

Dr Kenneth Ginsburg on resilience

just listened to a brilliant and human presentation on resilience and children by Dr Kenneth Ginsburg, and what we can do to help them weather life storms, deliberately and intentionally.  Directly connects how I go about coaching my youth soccer teams, using athletics as the vehicle for important life lessons. his work is definitely worth your time

reflections on Kotter’s change model and appreciative inquiry

Change Management process ITIL (Photo credit: Wikipedia)

Should organizations be looking at how to change themselves to adapt to an environment or should they look for environments in which their organization is prone to succeed and stay with what they know?

Those who believe in the latter approach, are advocates of the core competency model.

Kotter‘s model is concerned about minimizing error or avoiding it altogether. Can his model be reconciled with the positivist approach of appreciative inquiry?

Kotter’s model seems to emphasize the top-down approach through leadership, beginning with vision and having the leaders drive the change direction and change management. Only after the vision is established does he talk about communicating for buy-in. Does this bypass stakeholders for the sake of efficiency? Is there room in the Kotter model for good ideas from the bottom to dictate the direction of the organization?

Is it reasonable to expect that people at the bottom levels of the organization have sufficient strategic insight to be able to offer good advice on strategy?  In other words, is everybody’s opinion equally valuable?

In the face of resistance, how do we know when it’s time to persevere and push through or time to adapt?  One man’s persistence is another man’s stubbornness.

One of the principles of action research when it comes to making change stick is the importance of making changes in infrastructures and policies. That doesn’t seem to be part of Kotter’s eighth step. Is that an oversight?

When is innovation the enemy of efficiency? How do we know whether to prefer the new change over improving our current process through standardization and eliminating waste?

Related articles

• How Can Leaders Root Out Complacency from Their Organization? (forbes.com)
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• Change Management (Part 2) – Step Models of Change (martindavis01.wordpress.com)
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• Change Management (Part 3a) – Change Capability (martindavis01.wordpress.com)
• Change Management (Part 3b) – Success with IT Change (martindavis01.wordpress.com)
• Can Your Organization Handle Losing a Leader? (forbes.com)
• Guiding Coalition: Move Your Organization Forward, Year After Year (forbes.com)
• Change Management (Part 1) – Cracking the Code of Change (martindavis01.wordpress.com)
• May 18, Managing Change: Strategies for Managing Change (more-for-small-business.com)

weekend report review June 18, 2011

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Cover of Sideways [Blu-ray

http://www.youtube.com/watch?v=oxKBpxlGtnE

main themes: playing defense as the bearish trend is now officially strong sdn we are on the boundary of a Volatile Sideways market

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charts of interest link

http://www.youtube.com/watch?v=sSJIZMLbD6s charts of interest link

daily report review link

http://www.youtube.com/watch?v=ZHnn5XepgDw daily report review link

Trading is like shooting…

in rifle marksmanship, we talk about the “natural respiratory pause” the moment of balanced hesitation between the exhale and inhale during normal breathing;

this is when we teach the shooter to squeeze the trigger, when the body is at maximum stability

there are 2 moments: after the inhale is complete, but before the exhale begins; and after the exhale is complete but before the inhale is complete

now, think about the metaphorical relationship between rate/type of breathing and the amount of relative volatility

a bottom tail, then, corresponds to “last gasp”

May 04, 2011: pre mkt notes: silver off sharply overseas

preparing to manage our silver short trade in ZSL, which looks favorable right now with spot silver down sharply in the futures after a night of weakness.

we are already pushing the historical boundaries for corrections over a 5 and 10 day period so at this extreme condition further sharp moves are expected

Sharing my BrainMode power report

wanted to share out my BrainMode power (BMp) report.

BRAIN MODE power for Professional Development for Ken Long

Quite a few folks had expressed interest in learning more about BMp, so I thought I would share mine and how I will use it in my trading practice

As/if you read further, Notice the auditory, visual, kinesthetic language; notice the implicit and explicit beliefs…

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I took it this morning, when in a trading frame of mind

To me, the market is a learning laboratory for self-discovery; It allows us to experience its nature thru whispers, glimpses, and nudges in the results we get from our trading.

I have become even more auditory than I was 2 years ago when I first took this instrument; i attribute this to doing more recordings for Youtube for trading and teaching, and to the amount of time I have been spending in my doctoral program reading complex material. As I read, I hear the words and concepts in my head, I see how they connect (or not) to my cognitive/emotional maps, as I try to fit them into my paradigms, worldviews, cognitive  word-nets/cognitive maps.

I conceptualize top-down and then fiddle to see how the eaches fit in, listening for reactions, looking for jagged edges & anomolies, feeling for friction, tension and goodness of fit. I test to see how it works locally and then scale up to listen and look for effects across other domains, and see how the new “whole load” is distributed across my load-bearing members.

I will go thru this report in detail over the next 2 weeks and  use it as a lens to compare to my trading practice, in order to uncover more insights about how I may better plan, prepare, execute and reflect upon my results

The BrainMode Power for Professional Development comes with a series of 14 weekly followups with additional insights  and exercises, tips and recommendations that can be applied, in order systematically deepen my self awareness of learning styles, preferences, my beliefs about them and how they intersect with and are manifested in my trading practice.

Calibrating my practice, as it were

Each of the folks coming to the research weekend and the live trading week have been sent their links to take the instrument and have a chance to play along and learn.

I will be keeping my notes in my learning journal, and will use that to focus my efforts.

My learning journal has 3 columns:

1. The event/experience/insight in rich detail

2. What I think and feel about it, and how it connects to my world view

3. What I will do about it

These reflect the Kolb Experiential Learning Model in a condensed form, one of the leading adult learning models in use these days.