Management games for deep insight

Peter Checkland’s Soft Systems Methodology (SSM) describes the use of models to help us frame questions to ask of the world, and which help us become explicit about our world views, assumptions, frames of reference, theories of cause and effect, values, and desired outcomes.

Checkland, P. (2006) Learning for action: A short definitive account of soft systems methodology and its use for practitioners, teachers and students.  Chichester, England, Oxford Press

 We’ve developed a deceptively simple Force Mgt practical exercise in the form of a card game. The complete rule set is simple; takes 5 min to scan and understand. 

Rapid rule summary:

1. Students buy forces (5 cards) from a production table (a limited deck) and in each of 5 rounds,  deploy them into 5 regions to compete for Victory Points

2. Win:  first one to 51 victory points OR most points after 5 rounds

3. Game: lasts up to 5 rounds

4. Each round has 5 hands , each hand is worth Victory Points (VP)

5. Hand 1 is worth 6 VP, hand 2 is worth 5 VP etc…

6. Player 1 buys from the red deck, player 2 from the blue deck)

7. After you buy your 5 cards, you place 1 card face down in each region (hand)

8. Once all cards are placed,  cards are flipped over and you determine results

9. If your card wins the hand you get the victory points and keep you card; if you lose the hand, you get no victory points and lose your card. If it’s a tie, you keep your card and no one gets points.

10. Each player has an identical deck to buy from.

 It turns out that the development of strategy and then fielding an appropriate force really matters, AND there are distinct choices that are meaningful, available and feasible.

If you are interested, we’d like you to review the rules, and :

• 1. Buy your first round of forces
• 2. Deploy them into the 5 regions for turn 1.
• 3. Send your “Round 1” move to long-kenneth@conus.army.mil, along with a short description of your strategy

 We are interested in examining the variety of forces and the strategy employed in round 1.  Do you, for example:

1. Buy 4 ea 10s and a Joker to kill any enemy aces and retain max budget  flexibility to see what he has remaining?

2. Buy aces early to get a lead on victory points and then protect them?

3. Buy Jacks to kill 10s while still preserving SOME budgetary flexibility?

4. How do you balance economy of force with winning victory points? (efficiency vs effectiveness)

5. Variations?

 And then tactically employing forces, do you:

1. Put aces against 6 and 5 victory point regions?

2. Put 10s against 6 and 5s to hunt aces?

3. Aim for maximum victory points each round?

4. Aim to capture 11 of the 20 available points each round? (ie bluff on 6 and 3, but try to win 5,4,2?)

 In the actual play of the game we’ll look for adaptability and learning, and how strategies change after teams have played each other a couple times etc. 

We’ve play tested it enough to know there is a rich source of insights available in the game and that it is simple to play. We’ll  play it with decks of cards in the classroom 

We prototyped the game in our Force Management elective and are satisfied that that we generate student interest and insight into broader questions of Army force management in an interesting way.

 Here are some student insights gleaned from our playtesting:

1.  Round 1 results dominate the rest of your strategic choices, so getting Round 1 is crucial.

2.  Round 1 strategies are dominated by uncertainty because you have no information about your opponent’s strategy or adaptive style yet.

3. You have to decide when you want to buy strength: early and aim for quick wins, or later after you have seen pieces of the opponents forces and strategy.

4. Forecasting your opponents moves is problematic and make this more like poker than chess or bridge.

5. Aces are like the FCS: dominating until low-cost alternatives found the weakness. It wasn’t unit Aces were developed that the 10s became meaningful, so be alert to deep flaws in complex technologies.

6. Kings are costly but dominate the field; An opponent with Kings drives you to buy Aces but make you vulnerable to 10s.

6. Jacks (J) are a low cost success strategy against 10s, but can be incrementally be defeated by other mid-weight forces.

8. The costs of transforming cards between rounds is significant but manageable and may lead to strategic advantage. Scenario: You buy Aces on the first round and are successful, opponent buys 10s to kill your aces in the second round, but you trade down to Kings which dominate, and which remain difficult to defeat in subsequent rounds.

9. Deciding where (in what regions) to selectively deploy strength

10. Tactical results can overcome strategic insights and strategic failures. Tacrtics can be game changing.

11. What if the enemy has different victory conditions? Price points? Has different rules?

12. What if new cards are introduced after the first rule set is established?

13. How much would you pay to see the opponents’ hands?

14. What if there are partial wins? Or more than 2 teams playing?

15. Simple games can be powerful learning strategies

 Conclusions: the game serves as a way to dramatize very clearly many of our force management challenges and is a useful way to create rapid, deep awareness of prime issues in this domain.

 Here are some insights from a dedicated gamer and management game modeler:

I suspect that for most people’s first play they are strongly influenced by a form of Confirmation Bias: the As are priced higher, therefore new players conduct their analysis from the assumption that As are more valuable. Depending on the goals of your concrete experience, that may be the best argument for keeping the current price structure. However, an ace of spades loses to seven cards, including four cheap ones, where a KH loses to only four cards that are both expensive and vulnerable — the KH is easily the strongest card in the deck.

I assume trade-ins are secret — in fact that for all practical purposes players are operating behind a screen during their setup phase — because knowing whether your opponent has made any trade-ins is very valuable information. You may want to specify that in the rules.

 Given the prevalence of 10s in everyone’s first turn strategies, it seems like the second-cheapest strategy is far more optimal than the cheapest — that is four tens and a jack of spades. That marginal $15 gives you a pretty good shot at a victory somewhere, and a decent chance of carrying more net capital forward.

 Here are a selection of previously submitted moves for  Round 1: (* = Joker)

Strategy 1
Region	Cards	Strategy:                  Cost:  102   Carry forward: 48
6	10h	I’m trying to kill aces while creating and deploying one, but putting it where it is unlikely to run into an ace-killer unless the other guys is trying an ace-killer strategy like mine.  I’ve got cheap on the ace I bought, which is a risk that may not be worthwhile. I’m expecting to kill an ace in either 6 or 5, win 4 outright, and lose in 3 and 2.  Expected results are thus 9.5 points to me, 10.5 points to the bad guys, I will lose approx $35 worth of cards and kill approx $70 worth.  The enemy is expected to have spent rather more than me, so I will have more cash with which to restructure in light of what I find out. Cost: 102
5	10c
4	As
3	10d
2	10s
Strategy 2
Region	Cards	Strategy:                   Cost:  150   Carry forward: 0
6	10s	10 is the ace killer on 6, then we try to overpower each successive category on the way down.  Assumes aces go to 6, which rapidly becomes a tail-chasing assumption.
5	As
4	Ks
3	Qs
2	Js
Strategy 3
Region	Cards	Strategy:                   Cost:  123   Carry forward: 27
6	Jh	Hunting the ace-killers, retaining some flexibility, winning early points
5	10h
4	Ah
3	Jc
2	*
Strategy  4
Region	Cards	Strategy:                   Cost:  150   Carry forward: 0
6	Ah	Maximum strength in every region
5	Ac
4	Qs
3	*
2	*
Strategy  5
Region	Cards	Strategy:                   Cost:  145   Carry forward: 5
6	Ah	Maximum strength in main regions, try to hunt an ace and kill 10s; accept risk in small region
5	Ac
4	10s
3	Js
2	*
Strategy  6
Region	Cards	Strategy:                   Cost:  149   Carry forward: 1
6	10s	Hunt aces and accept risk in regions 5,6, steal points with aces & J in regions 2,3,4

3 out of 4 isn’t bad, it’s the government!

Here is how modern economics is played. You need to know this so you know how to protect yourself.

Picture 4 groups:  government, the middle class, the banks, and the speculators.  3 out of 4 groups have acted badly in the housing meltdown.

Consider:

1. Speculators bought houses they couldn’t afford to try to make a quick buck in real estate. When they failed, they get bailed out, and in some cases get to stay in homes at a much reduced rate, on the backs of the middle class.

2. Banks (some) lent speculators money they didnt have to buy houses they couldnt afford. If you didnt make bad loans, you faced government censure. When the banks received bailout money they paid off bad loans, not the good loans.

3. the government: underwrote the bad loans, darn near required the bad loans to be made, then raised taxes on the middle class to cover the banks losses.   Then the governmant allowed banks to write off the bad mortgages and keep the good ones paying.

4. The middle class pays for everything, but they didnt get their mortgages and credit card balances written off, even though they have demonstrated they are the bty far, the best stewards of money from among the 4 groups.

any questions?

extra credit: if you were a good steward of your money and the planet you bought a car that gets good gas mileage. Now you get to pay for the morons who bought cars that get terrible mileage, who get a handout  at your expense.

because the government is shocked…shocked! that people will lineup for free money, they are now throwing another couple of billion after the first billion in the cash for clunkers program.

Survival and reward for the most unfit. That’s how you get ahead in modern economics.

US will soon be unable to rely on the kindness of strangers

The rest of the world will apply the fiscal discipline to us that we can’t develop on our own.

eventually people get tired of giving the drunk money, and he either gets clean out of necessity or turns to a life of crime.

Higher taxes, or reduced federal benefits and services – or a combination of both – may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year – the largest federal spending category after Medicare-Medicaid, Social Security and defense. It’s quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

Profitable ETF Trading Strategies: appreciating the power of rehearsals

Rehearals are considered to be one of the highest payoff practices in the military planning process. It’s where units develop and reinforce the patterns of action and decision-making that make all the difference in combat.  Rehearsals  will improve your trading practice as well, if you understand how to do them well.

There are 4 main reasons why rehearsals can improve your trading practice:

1. Practice essential tasks.  By identifying the critical tasks in your systems, you can focus on the ones that contribute the most  to success or failure

 2. Identify weaknesses or problems in the plan. You often will not discover  gaps in your logic or problems with the concept until you have “driven the route ” from start to finish from the perspective of the operator. This is especially true if you have built your plan out of component pieces, each which are individually sound, but have not yet been linked together before.

 3. Coordinate subordinate element actions.  When you use a building block approach to trading system development, sometimes  you will discover that the sum of the parts is different than the whole. This means that there are unknown or unintended consequences of piecing things together which are not revealed until you put the plan into operation, or better yet, have a decent rehearsal to test the seams.

 4. Improve understanding of the concept of operations. Once you have driven the entire plan, you will develop a sense of completeness and appreciation for its qualities or problems areas from the top down. You will be able to see the seams, where pieces come together in utual support or in sequence.

By paying close attention to your rehearsals, and making them as realistic as possible, you will be able to dramatically improve your trading practice.

Taken together with effective After Action Reviews, rehersals are an important part of your preparation phase. Time spent here will add directly to your bottom line.

Profitable ETF Trading Strategies: Respect Volatility, use its power for good

At the most fundamental level, volatility is the fluctuation in the price of an asset. The greter the price swings in the shorter periods of time, the greater the volatility. Periods of great volatility are like thunderstorms. They get your attention.

Volatility is an absolute requirement for a trader to make money. Most investors look at volatility with fear and trepidation, and properly so, because wild swings in price are an indication of uncertainty about the fair value of the asset in question. This uncertainty will play havoc with your bottom line as an investor. It is a normal tradeoff consideration for investors to give up the potential of outsize gains in exchange for protection against downside volatility.

 

It is clear from scholarly studies that increases in volatility correlate strongly with declines in equity value. If you look at bear markets you see volatility everywhere, leading to tremendous gains on up days and tremendous losses on down days. This volatility  is what drives longer term investors to the sidelines and creates the window of opportunity for longer term value players to establish excellent entry points for long term holdings in beaten down companies and sectors. This eagerness to buy value at a discount is why we see buying pressure even in the midst of the worst bear markets.

 

Traders who are looking to make their loving off the buying selling of inventory need the volatility of longer term position traders and short term scalpers to move price in swings that last long enough for them to realize their gains while offering the buyers and sellers from other time frames reasons to get in and out of these positions as well.

 

Because swing traders do not need fundamental beliefs in their positions they are able to operate successfully in swing trades during bear markets, and providing that they can manage their risk in the periods of higher volatility, should be eager to trade on the most violent of das in the market.  For a swing trader the greater the intraday volatility, the easier it is to see opportunities and frame favorable trades in terms of reward to risk. 

Like electricity, volatility can be your best friend or your worst nightmare. As a trader you must learn to use the power of volatility responsibly and effectively.  Stay grounded and respect the power for your own good. 

Profitable ETF Trading Strategies: Good traders know and exploit their edge

As an individual trader, you must be absolutely clear about where your edge is in the market place so that you can ensure your trading strategies are designed to put you into positions where your edge can make the difference against the average market return. 

Let’s be clear too: your edge must give you a reliable means of achieving better than average market returns or you are much better off simply buying and holding lowest cost broad market index exchange traded funds. To do otherwise would be a waste of your time and get you a lower than easily achievable returns on your capital. 

When I consider institutional traders, I see their advantages in computing power, depth of fundamental research, administrative trading cost efficiency  and legitimate inside information, I quickly conclude that there is no way I can find an edge by trading in direct competition with these organizations on a fundamental basis. 

This means I am going to steer clear of situations where my edge would consist of having a better understanding of the fundamental business model and market opportunities of individual firms. The fact that so many businesses go out of business due to misjudgments of market conditions when led by  experts who have a made a career out of narrowly focusing on that line of business suggests to me that I can not hope to have an edge in fundamental analysis. 

I also know that I am not capable of scalping better or market making better than brokerage houses who are fighting for fractions of pennies on large volumes in time periods measures in fractions of seconds. So I will stay out of that trading environment as well. 

I know that I need enough opportunities to allow my statistical edge in trading to manifest, and so I cannot afford to have overly long holding periods and wait for the ship to come in. I believe I need to be like Walmart and trade in quality merchandise that everyone wants, take my decent profits quickly and cycle through inventory efficiently. I want to be the swing middle man helping the market achieve orderly distribution. 

This leads me to look for my edges in the swing trade time periods of 1-5 days, and looking to lock in profits and/establish  no-lose positions as early as possible on the entry day, and only hold overnight when I have clear indications that the extra overnight risk is justifiable. 

Know your edge and stay within your area of competitiveness.  

Profitable ETF Trading Strategies: Stalking your way to success

One of the more neglected topics in trading systems development is the concept of stalking. Traders, particularly early in their career will tend to spend  lot of time, if not ll of their time, focusing on the entry, reasoning that if they can get that part right they will have some control over the market’s inevitable follow thru, which must go according to plan, because of the predictive power of their perfect entry technique. 

If, as a trader, you are able to survive this philosophical approach to the market, based on certainty, control and predictability, you will move along to other aspects of a complete trading system, like the exits, position sizing, trade management of open positions, portfolio heat, overnight rick management, re-entry and matching system performance to specific market conditions. 

These are non-trivial issues in the development of an effective system. Stalking the trade however has to do with the period before the trade is engaged, and offers you opportunities to leverage what may be your greatest edge as an individual trader, if you have discipline and patience to do it properly. 

I believe that stalking is intimately and directly connected to your deep understanding of the edge your trading system has. The better you understand your system and your edge, and the market conditions that favor its use, the better position you will be in to stalk effectively. 

Think of a pride of hungry lions on the hunt. Their stalking consists of knowing their market (their prey) and where they will inevitably congregate in large numbers (watering holes and  grazing lands which represent their trading opportunities). Effective stalking consists of taking advantage of their natural strengths in the market conditions that favor their methods. 

Liosn will sniff the air at a hint of a suggestion of the possibility of their prey. They will scan widely and contuously and begin fllowing the scent until they can vector in on their target and begin their hunt in earnest. Their stalking gets them reliably into the right position to begin the hunt.  That’s what your stalking must do for you.

Your stalking should include some early warning signs that let you know the market and trade conditions that favr your system are starting to emerge from the market mosaic. You can start posturing yourself for action early enough to conduct trade framing and execution rehearsals, and contingency planning, so that if the favorable conditions continue to develop you will be able to take the trade in stride, with full preparation and risk management in hand. 

Depending on the nature of your system and your edge, your stalking may take a different form, but it will always incorporate an early earning system, preparation planning and rehearsals if you want to achieve best results. 

Patience and discipline are the essential qualities of mind that you will need to exploit your deep understanding of your edge.

Profitable ETF Trading Strategies: Finding your best mental state for trading

In previous articles I have described my concept of the “zero-state”, and the combination of personal satisfaction and improved bottomline performance I get when I trade from that state. 

In this article I want to describe some other mental states that traders I know find useful and consider the implications for your own journey of self discovery and trading mastery.  It is my hope that you may discover that it works for you or that the journey of discovery may awaken you to other states along the way that you will find equally satisfying and useful. 

After all, trading from an emotion free state (like my description of the zero state) may not be the best mental state for you. For example, I know traders who find it necessary and useful to achieve a state of emotional alpha male competitiveness in order to enter the ring of combat, which is how they perceive the markets and interpret their role. 

Without being mentally prepared for the combat they anticipate, and therefore see, they will be undercutting their own effectiveness in the trading arena. 

Another effective trader I know has a need to see himself as a pure mechanical businessman and must take a different approach: that of disinterested observer;  He gets so disinterested that he cannot even watch the trades unfolding lest he start adapting his rules in mid trade. His analysis showed that this was not adding value, and so his mental state needed to be as far away from engagement as possible. 

These were  just 3 examples of different mental states being suitable for effective traders, which implies that there may be as many unique states as there are traders, which means that you must use introspection and self knowledge to discover what works for you psychologically as well as needing to examine trading strategies that suit your personality, time frame, risk profile and working hypothesis of market behavior. 

How will you know? Know thyself, consult with trusted others, but above all else, make sure you are trading with real money in very small position sizes to assess the effects of market, system, money and self on your total trader’s performance system. Without that essential step you are postponing the day of judgment. The sooner you get into the game, the sooner you will engage in real learning.

Profitable ETF Trading Strategies: Experiencing the Zero-State

For me, achieving the zero-state is a necessary precondition for trading at my peak. In other essays I have described it as a place where adjective pairs of mental states cancel each other out, leaving only a moment of pure being.

It is the space between the words that we know, a moment and a place of freedom, where all notes may be struck, the moment precisely before the next action occurs.

For a horn player, it is the moment where he has gathered his breath and is prepared to initiate the note, the pure balance point between inhale and exhale.

For a diver it is the moment of motionless serenity between ascent and descent.

Imagine a Cartesian coordinate semantic grid system with adjective pairs arrayed about the origin, with each word having its precisely paired antonym and where the midpoint of the ray that connects them is bisected at the origin. That spot in the semantic meaning gris is where I seek to trade from in order to have my trading takes its purest expression in both action and no-action.

When I trade from this moment, this place, my results generate neither joy nor sadness, and simply are what they are. This allows me to enter the next trade with no emotional charge.

It is also keenly important to my style of trading where I am looking for the hesitation point in a channel trade or in a breakout, where price remains poised between fear and greed, where bulls and bears are in timeless balance and the next leg of the move will begin just as the last leg ends.

When I am able to stalk the price to that moment of harmony, that zero-state where momentum transitions I am able to refine my entry to very tight level levels and find initial capital preservation stops that are absurdly close, which enable me to minimize open risk and move to “no lose” trade conditions very quickly.

 When I know that barring an interruption of connectivity or market discontinuity I will never do worse than break even,  this is an immensely freeing psychological state to be in as a professional trader and yet it’s value for me is in the spiritual nourishment and satisfaction I experience having a brush with Truth and Perfection in a small way for a fleeting moment in my life.

In judo we speak of a moment in a throw where you and your partner are equally sure that the other judo player is throwing you with exactly the same force and skill as you are throwing them. In that moment the throws stop, time slows, and you are suspended in a moment of pure being.

What I like about trading is that as I approach the zero state my equity curve smoothes and my trading practice is rewarded

Profitable ETF Trading Strategies: Trading From the Zero-State

One of the most important qualities of the professional trader is the ability to manage your psychological state.

Psychology is such an important component of shorter term trading that it can make all the difference between success and failure.

In my own trading, the essential state of mind I must be in to trade at an optimal level is what I call the “zero-state”.

For me, it represents an emotionally neutral state that is neither happy nor sad, neither overconfident nor fearful. The adjective “calm” starts to come close to what I mean but there is an important difference. “

Calm” is part of an adjective pair, whose partner has precisely the opposite meaning. “Stormy” is usually given as the antonym. For me, this moment is one that may not be contained in a conventional adjective that describes a state, because I associate adjectives as being part of a word pair, with its opposite on the other side of the continuum whose exact center I think of as “zero”, as on the number line.

Conceptually, the Japanese term “mu” comes fairly close to this idea, having been variously described as neither yes nor no, but a state in-between that does not acknowledge the question being asked as one that may be answered by wither yes or now, with the answer existing in a different plane of reality.

Serenity is a word that describes a state that comes even closer than calm, because it suggests for me something more like a timeless eternity of “no-emotion”, where I am not connected to the outcome in a personal meaningful way.

For me the pure form of the act of trading is to achieve a timeless correctness, to take actions or to refrain from actions in perfect balance with the needs of the market t that moment, to be nothing more or less than that which is required ideally.

In Cartesian coordinates the point (0,0), is called the origin and is central to all subsequent mathematical operations. It is the point from which all action begins and where excursions are grounded for reference. It is the ultimate reference point that links together individual cases .