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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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

Premarket call May 08, 2011: all the precious metals up in the overnight trade

building on Friday’s momentum (or putting in the first peg of support) all the precious metals are up in the overnight trade; silver is in a perfect “max pain range compression” stage here, ready to break out of Friday’s relatively tight range in either direction with advantage

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Weekend report review May 07, 2011 links on YouTube

Youtube link discussing the weekend reports

http://www.youtube.com/watch?v=0gBXLyJxCow

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daily trading plan review link May 08, 2011

daily trading plan review link http://www.youtube.com/watch?v=ukYimU8A99U

opportunities developing tactically in precious metals, energy, commodities on their significant pullbacks.  Stable boring Dow stocks like KFT, JNJ, PFE, WMT cotninue to outperform

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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…

===================================================================

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.

breathing = trading

• ask yourself: “what is the crowd waiting for?” “What do they need to see?”
• What would confirm in their mind that the trade is NOW?!”
• learn to see it before it happens
• create separation between you and the crowd
• be on the edge of them, so you can sense the mood, but don’t be inside the crowd
• be aware of the crowd but be OF the crowd
• be positioned in the quiet moment before they take off running
• let their energy propel your position
• if you are using “Red-Doji-Green-Go” on the 5s, consider the 1s or 3s as you see the front end of a doji occurring
• what’s a doji look like as it is beginning to form?
• a change in the downtrend that was the big red candle….failure to fail further, created the beginning of the doji
• that’s the time to dial in and listen carefully
• do you hear the absence of further failure?
• do you hear the quiet pause between exhale (fear, selling, money flowing out) and the inhale?
• (beginning to generate the energy of the next leg up)
• this is the “natural respiratory pause”
• this is the moment we train in marksmen
• to pull the trigger at a moment of stability
• in between the exhale and inhale
• it’s the most stable moment in the body
• there are 3 points in the breath: inhale, pause, exhale
• in your practice of meditation, do some breath work:
• 4 counts inhale, 4 counts pause, 4 counts exhale, 4 counts pause
• learn to recognize and feel each state
• learn the quality of the pause
• feel your smooth emotional state
• sip the air in, hold, let it seep out, hold
• now feel price breathing
• learn to dial in to the pace of the breath in the cycle that seems to be in force
• sometimes at the opening its 5s and 1s; later it may be 15s and 5s, or 60 and 15
• try Ken Cohen’s CDs on breathing meditations
• monitor the breathing of the crowd
• but don’t breath with them
• stay true to your cycle of breathing
• dont match their pace
• watch cats stalking and watch their breathing

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Reflections on leadership and risk management

Image via Wikipedia

Carol: as you develop experience with working for new and different bosses, you find yourself with a standard strategy of how to size them up and find out what makes them tick so that you can work with them and for them? Do you find yourself spending more or less time with that the more often your bosses change. How good are we had really reading peoples take motivations and personal preferences and how much time do we take to be certain of what our first impressions lead us to believe?

I share your concerns about the trade-off between reward and risk when it comes to taking on experiments. As you have seen in my commentary on Heifetz, I don’t think they give this important judgment enough treatment.

Regarding Brenda’s comments about leaders and a willingness to take on risk. The most successful risk managers that I know, and I work with many on a professional basis in the world of both finance and defense, all share a quality of a finely tuned ability to compare rewards with risks and a sense of how close to the edge they can navigate safely or relatively safely. An unwillingness to approach the boundary condition limits leaders abilities to move to the highest levels of an organization where complexity and uncertainty dwell but conversely where the greatest rewards and risks also dwell. It is precisely the ability to successfully navigate uncertainty for the highest of stakes that distinguishes the qualities of successful senior leaderships in my experience.

Regarding cameras comments about the risk-averse boss: you can see here a case where the boss is overcome by his vision of risk that he can’t see the reward and cannot figure out how to successfully integrate the two into actionable decisions while at the same time providing protection for the consequences of the actions for the rest of the organization. He’s been promoted beyond his ability based on what you’ve described. An unwillingness to act to seize opportunity is a natural response to overwhelming uncertainty. A friend of mine who is one of the most successful commodity traders in the world has a program of recruiting talent which examines this ability. Carefully and it is clearly one that is affected by the size of stakes. He has traders who can trade million-dollar accounts professionally but who cannot trade a $10 million account because they get overcome by the number of zeros. It is the context of the consequences of our decisions which make the decisions more difficult on the inside than they may seem to the outside observer.

This is why I think Heifetz is discussion on creating a sense of false confidence to be so dangerous. I am much more interested in examining what the basis for a feeling of confidence is than trying to convince yourself through the power of positive thinking to go beyond your skill level

Carol: as you develop experience with working for new and different bosses, you find yourself with a standard strategy of how to size them up and find out what makes them tick so that you can work with them and for them? Do you find yourself spending more or less time with that the more often your bosses change. How good are we had really reading peoples take motivations and personal preferences and how much time do we take to be certain of what our first impressions lead us to believe?
I share your concerns about the trade-off between reward and risk when it comes to taking on experiments. As you have seen in my commentary on Heifetz, I don’t think they give this important judgment enough treatment.
Regarding Brenda’s comments about leaders and a willingness to take on risk. The most successful risk managers that I know, and I work with many on a professional basis in the world of both finance and defense, all share a quality of a finely tuned ability to compare rewards with risks and a sense of how close to the edge they can navigate safely or relatively safely. An unwillingness to approach the boundary condition limits leaders abilities to move to the highest levels of an organization where complexity and uncertainty dwell but conversely where the greatest rewards and risks also dwell. It is precisely the ability to successfully navigate uncertainty for the highest of stakes that distinguishes the qualities of successful senior leaderships in my experience.
Regarding Tamara’s comments about the risk-averse boss: you can see here a case where the boss is overcome by his vision of risk that he can’t see the reward and cannot figure out how to successfully integrate the two into actionable decisions while at the same time providing protection for the consequences of the actions for the rest of the organization. He’s been promoted beyond his ability based on what you’ve described. An unwillingness to act to seize opportunity is a natural response to overwhelming uncertainty. A friend of mine who is one of the most successful commodity traders in the world has a program of recruiting talent which examines this ability. Carefully and it is clearly one that is affected by the size of stakes. He has traders who can trade million-dollar accounts professionally but who cannot trade a $10 million account because they get overcome by the number of zeros. It is the context of the consequences of our decisions which make the decisions more difficult on the inside than they may seem to the outside observer.
This is why I think Heifetz’s discussion on creating a sense of false confidence to be so dangerous. I am much more interested in examining what the basis for a feeling of confidence is than trying to convince yourself through the power of positive thinking to go beyond your skill level

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