Home > Creativity, management, Markets, Planning, Uncertainty > Profitable ETF Trading techniques: Systems thinking for traders

Profitable ETF Trading techniques: Systems thinking for traders

The purpose of this article is to review some of the highlights of systems thinking.  My focus will be on practical applications and rules of thumb, rather than trying to develop a scholarly article which would only be of interest to … well, scholars! I will make every effort to do you no intellectual harm, and leave you with an appreciation for what systems and systems thinking are all about.


My background in systems management dates to 1991 when I began my graduate studies in the University of Southern California’s  Systems management program, which had developed in the 60’s as a way to respond to the difficulties in managing large manufacturing programs which required managers and engineers from many different disciplines to coordinate their efforts to create complex weapons systems like the Polaris class submarine and B-1 bomber.  These projects were so complex that no one discipline knew how to go about building one, nor how to many a diverse project team encompassing and managing finance, weapons, propulsion, safety, automation, materials,  electronics, and human factors.  Computers only seemed to complicate matters.  No one knew how to get the projects done on time and under budget, or how to handle the myriad changes and learning moments that inevitably arose in a long complex project.


            It also turned out that the senior leader’s background had an undue influence on the outcome of the project, with weapons engineers building big guns with little to no living space for the crew, while an accountant would bring the project in  under budget but without the capabilities sought in the original specification.


            Tackling this problem, USC and the government developed a program that developed managers with the skills to act as the middlemen between disparate work groups. They developed managers who looked to develop optimal end-products by integrating the efforts of the different disciplines. The program quickly adapted much if the learning about systems that was simultaneously emerging from both the natural sciences, anthropology and physics.


            Systems thinking as an approach to problem solving manifests in many different fields these days.  Hard systems include mechanical and automation systems that are often modeled in simulations to examine complex interactions and the dynamics of change.  Soft systems include complex social organizations and can include many qualitative components that are not easily modeled with cause and effect rules and linear relationships. Evolutionary systems are thought of as complex open systems which have the capacity of learning, adapting and changing over time in response to interactions with and feedback from other systems and the environment.


            In general, systems are usually defined as a complex and dynamic whole, which acts as an organized entity for a purpose, and which needs all of its elements to function.


            Regardless of the domain however, there seem to be general considerations and implications from systems thinking with broad applicability. Here are a few:


            1. Systems are more than the sum of their parts, and include the relationships and interactions that are possible and which can combine in many unforeseen ways to produce surprising results.

            2. Complex behaviors and outcomes will often emerge from the interactions of a few simple elements and processes in ways that were not predictable.

            3. Systems thinking almost always incorporates the building of a model or a description of the system under study, during which opportunities for learning and insight and communication emerges to the amazement of participants who come from different points of view. In fact, this learning moment can be the paradigm shift that enables breakthrough thinking with lasting consequences.

            4. The best modeling efforts seem to be iterative, interactive, and integrative. The group spirals around the issue or the system in multiple loops, coming back to add details and insights that emerged in the group’s travels around the systems boundaries and through its depths. There is learning and feedback between participants and the model and that we learn as we go.  Finally, points of view are incorporated

            5. A useful model for systems building treats the system as a collection of inputs-processes-outputs that co-exist for a purpose and in an environment that has both direct and indirect effects on the system and which will provide feedback in different ways to the systems actions.

            6. A systems can be seen as sub-system of a larger system, and is itself composed of smaller systems. For this reason, it is usually important to specify scope and time constraints as boundaries lest the effort never get out of the definition phase!

            7. Feedback loops and mechanisms turn out to be crucial to understanding processes of adaption and growth and for understanding the phenomenon of 2d and 3d order effects.

            8. Friction, timelags, resistance and non-linear relationships are generally found in all complex systems which helps to explain and understand situations where simple cause and effect rules don’t seem to work well.


            In practical terms, in my roles as a trader, an educator, a manager and leader of large organizations, or as a member of a work team, I have seen the systems thinking approach provide a way to get started with the process of understanding, visualizing, describing and directing efforts to achieve our goals in complex, uncertain environments. It is an effective way to engage with complexity, when simple rational analysis proves to be inadequate for the job at hand. But beware! As my professor Dr Jones (lead engineer in the B-1 bomber program) often said: “Once you start down the path of systems thinking, you will never be satisfied with simple answers again.” 


            With these thoughts in mind, what can a trader do with systems thinking?  Where would one begin?  Here are 5 things to consider:


1.       Start with a systems map of your own trading process.  Identify those Inputs-Processes-Outputs that are directly involved in your strategy.  Then identify those environmental elements beyond your control that have the greatest impact on your performance.  This formal systems definition process is sure to help you focus on those areas you can control or change directly and those that you must endure, and is a great basecamp in your journey of self mastery and trading excellence.


2.       Engage with a master mind group to help you examine the assumptions and implications of your beliefs and procedures.  Adding new perspectives and points of view will reveal blind spots and insights that you might never find on your own.


3.       Look for the feedback loops from the trades you take and the trades you pass on in order to examine what is being learned and what else might be learned through self examination.


4.       Look for dynamic relationships in your trading that may not have direct causal effects, but rather look for connections that  bring your actions home to roost.  Try to imagine ow 2d and 3d order effects can arise from  chain of events triggered by your trading decisions.


5.       Look for ways that your system can learn and evolve and grow in your chosen environment. Seek for ways you can adapt your systems to new environments.

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