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How To Win 99.9995% of the Time
Imagine performing one of the most complex tasks in modern life and doing it with 99.9995% accuracy, irrespective of your intellectual ability, cultural background or physical prowess. That’s what the civil aviation industry achieves every single day.
The modern airplane is one of the most complex systems known to man yet only one of 200,000 flights ever experiences any kind of life-threatening emergency. That’s a much safer record than driving a car. So how? How does modern aviation transcend human stupidity, cultural bias, and mental distraction to generate such an enviable safety record?
They use a checklist.
The notion of a checklist goes back to the earliest pre-WW2 days of modern aviation when a series of PREVENTABLE accidents caused by EXPERIENCED pilots forced the industry to create a protocol that can be used by ANYONE to reduce the risk of error.
On its face, the checklist can be mind-numbingly boring -- make sure the switch is flipped on. Make sure wipers work and many other minor details that are easy to gloss over and ignore. So the checklist by itself is not enough to assure success. The key is to get voluntary coordination to adhere to the checklist every time. During WW2 the US Air Force realized that the checklist was not enough. Pilots needed to have a compelling narrative in order to follow it.
The narrative in aviation is of course death. Pilots were given many instances when ignoring the checklist resulted in a crash. Additionally, flying authorities realized that checklists are much more effective in a group setting where the whole group accepts its value and each member double checks the checklist taking responsibility for the whole group. That’s why co-pilots check with pilots and the degree of compliance in the aviation industry is nearly 100% resulting in such a stellar safety record.
Unless you trade in a group, compliance in trading becomes your own responsibility, but traders, especially algorithmic traders, can benefit enormously from a checklist. Trading an EA is very similar to flying a plane. Everything from -- is this thing on, to are all switches (parameters) properly configured, to is the EA off at certain times can be confirmed through a checklist.
A simple checklist for an MT4 EA can be something like this:
Is my VPS working?
Is my EA on and Auto Trading Turned on?
Is my trade size correct?
Is my stop value correct?
Are my entry parameters correct -- check each one?
Is my EA turned off xx hours ahead of event risk?
Is my EA turned off for the day on ALL charts?
Anyway, you get the idea. It is in practice relatively straightforward, but even looking at this modest list, if you were honest, you would probably admit to yourself that you missed a few key steps at least once a week that may have resulted in unwanted losses.
The basic checklist for the control of inanimate machines is a simple affair. But what if you had to deal with a greatly complex environment full of danger and uncertainty? If you think I am talking about financial markets. I am not, I am referring to medicine where the recent application of checklist procedures has been able to reduce deaths by as much as 47% on surgical outcomes.
Surgery is of course very similar to the markets. You are applying well-practiced techniques, yet every patient (trade) is different. At any given time the environment can change from calm to a crisis in a blink of an eye -- what do you do then?
In medicine, the checklist goes beyond, do-I-have-the-right-tools-and-is-everyone-in-place to deeper questions of what do we do if things go really wrong. Atul Gawade, the author of Checklist Manifesto (a modern day Chekov) and the leading proponent of checklist practices in surgery, recounts a time when he nicked a key artery in the patient, an unfortunate stroke that would have surely resulted in death, were it not for the fact that the team’s checklist contained a note that the tumor was particularly close to this artery and the anesthesiologist stockpiled a massive amount of blood in the OR which saved the patient’s life.
The what-do-I-do-if-all-hell-breaks-loose checklist can be particularly valuable in trading.
Some possible questions could be?
What do I do if I placed 10X my normal size?
What happens if I am carrying more than my maximum of open positions?
What do I do if I lost 10% of my account in one trade?
What happens if my internet goes down?
What happens if my VPS goes down?
What happens if I have 3 losses in a row?
Notice that the second type of checklist is much more open-ended and forces you to think through the most unpleasant scenarios before they actually occur. This is incredibly valuable as it will minimize the chance of making a bad situation worse.
It’s important to understand that the checklist in and of itself will not make you profitable. You need a strategy to do that. But so much of the trading edge lies not in looking for an opportunity, but rather in eliminating the error. To that end, the checklist gives the trader the most valuable tool of all -- control.