Trading Checklist?

  • Posted by
  • on July 23rd, 2011

“How does what is happening today fit into our framework for making this decision?” Ray Dalio

Over the years, I’ve always enjoyed reading lists others have made of trading “rules”.  Every now and then, I steal one of them for myself…here’s a list of principles I wrote at the turn of the year.  But trading is fast, too fast to refer to a list and make sure we’re covering the necessary bases before we execute.  Or is it?

After reading The Checklist Manifesto, I’ve had a slight turn towards the possible benefits of such a list.  Not a list like this from Tom Bulkowski, whom I greatly respect…sorry but I see nothing but paralysis there.  As Gawande says in his book, a checklist is only good to the extent that it is practical to execute.  For detail on the book and his thought process, I recommend this great summary from Frank Voisin for his takeaways.

The question is, can a trader execute a useful checklist in the time an edge remains open?  In my old mental model, I’d say no…too many steps cuts into the offensive mindset we need when entering a trade.  In the model described by Gawande, I think the answer is yes.  As the surgeon says “Checklists provide a kind of cognitive net.  They catch mental flaws inherent in all of us, flaws of memory and attention and thoroughness.”

What about a list including basics such as the following:

1) Have I considered the general swing climate in place, and acknowledged whether I’m acting with or against it?

2) Have I considered all levels of price memory that may provide an obstacle to even the ripest looking pattern?

3) Have I considered the durability of the news that brought the market to this level, and the potential for the emotion to be reversed?

4) Have I made myself aware of major earnings or economic events that may affect this trade in the hours/days ahead?

5) Am I acting in line with a time of day that is more likely to support my effort to fade or follow?

6) Is my stop area close enough to minimize damage but wide enough to allow natural volatility to take place?

I think that’s universal, comprehensive, and most importantly, reviewable in 30 seconds or less.  Sure, if one of the steps provides a “No” answer than I need to go back and review.  But isn’t that the point?  After thousands of trades, I still skip one or more of the 6 things on the list.  Why?  Because even against a simple 6-step checklist, impulse can creep in and tell me it knows better.  It doesn’t…each of those items is just as critical as taking a patient’s pulse, or checking the landing gear after takeoff, or ensuring that the strongest screws are used in securing sections of a skyscraper.  Yet we forget or worse, ignore, truths we know to be important.

From a Reuters article this week, “More than 50% of acquired infections can be prevented if health care workers clean their hands with soap and water or an alcohol-based handrub before treating patients.”  Wow, is that depressing or hopeful?  It’s not always ego, it’s just the chaos that goes on in a hospital shift.  Are markets any less chaotic?  Of course not…our cognitive load can overwhelm us and without rules a trader gets sucked into noise and confusion.  Every one of us read with awe the New Yorker article on Bridgewater this week…the Dalio Principles sounds more like a culture than a checklist, but how can we not be a little curious what he uses to cut through the noise?

As Corey Rosenbloom points out in his excellent Wednesdays with Wyckoff series, “whatever (rules) you choose to adopt, know it as intuitively as you would the rules of crossing the street.”  If Sully can credit procedure and luck for his ability to land that plane in the Hudson, I think we can at least consider what a short list of rules might do in improving our ability to execute.  I’d love to hear pros and cons on the subject, so feel free to leave a note with your thoughts…

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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