To: Ken Long <email@example.com>
Sent: Monday, December 30, 2013 8:11 PM
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.
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.
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!
http://www.youtube.com/watch?v=sSJIZMLbD6s charts of interest link
http://www.youtube.com/watch?v=ZHnn5XepgDw daily report review link
Youtube link discussing the weekend reports
- weekend market review, May 07, 2011 (kansasreflections.wordpress.com)