July 24, 2011- The Checklist Driven Approach

 “Maybe our idea of heroism needs updating.” – Geoff Smart

I’m very glad to have read Derek Hernquist’s recent post “Trading Checklist”, which lead me to Atul Gawande’s very wonderful article  ‘Airline pilot’ protocols in finance, which happens to be an excerpt of a book he wrote “The Checklist Manifesto: How To Get Things Right.”  Frank Voisin writes a neat summary of the book here.  If time permits, I’ll try to buy the book myself, but I’ve bought quite a lot of business/trading/non trading books recently, that it seems more justice that I finish what I first have in line before consuming again. 😀

Let me summarize the best things/highlights I’ve learned from the articles:

1.)  Finding a good idea is apparently not all that hard. Finding an entrepreneur who can execute a good idea is a different matter entirely. You need a person who can take the idea from proposal to reality, work the long hours, build a team, handle the pressures and setbacks, manage technical and people problems alike, and stick with the effort for years on end without getting distracted or going insane. – Geoff Smart

*Reflection – I feel that trading as a path to wealth is a good idea, and employing technical analysis to that path is also a good idea, but executing that knowledge into action, as I’ve experienced in my own line of work confers with Mr. Geoff Smart’s research.  Rarely do most traders translate knowledge of good trading ideas into exceptional execution.  I can count them with my fingers.  

2.) “We don’t like checklists. They can be painstaking. They’re not much fun. But I don’t think the issue here is mere laziness. There’s something deeper, more visceral going on when people walk away not only from saving lives but from making money. It somehow feels beneath us, an embarrassment, to use a checklist. It runs counter to deeply held beliefs about how the truly great – those we aspire to be – handle situations of high stakes and complexity. The truly great are daring. They improvise. They do not have protocols and checklists. Maybe our idea of heroism needs updating.” – Geoff Smart, in response to Atul Gawande on whether the checklist-driven approach has gained traction after his best selling businessbook Who

3.) People fear rigidity if they adhere to protocol. They imagine mindless automatons, heads down in a checklist, incapable of looking out of their windscreen and coping with the real world in front of them. But what you find, when a checklist is well made, is exactly the opposite. The checklist gets the dumb stuff out of the way.  

In aviation, everyone wants to land safely. In the money business, everyone looks for an edge. If someone is doing well, people pounce like starved hyenas to find out how. Almost every idea for making even slightly more money – investing in internet companies, buying tranches of sliced-up mortgages – gets sucked up by the giant maw almost instantly. Every idea, that is, except one: checklists.

Reflections on -2,3,4: In my personal trading, when I employed a trading journal, where in some ways , I had to fill out checklists such as whether I’m trading a left hand chart (bullish momentum, which sector, above or below moving averages etc), I had to fill out my maximum allowable loss in a given trade (check bet sizes, % execution on cutting losses etc), simple or what, it has accelerated the improvement in my personal trading.  I was never quite a believer of these simple journals, until I’ve tried and seen the difference in results.  Frankly, if I made a checklist myself on proper dieting, I think the results would also have been magnanimous (e.g. a checklist whether I ate vegetables and fish instead of loading on carbohydrates, for that meal).

I’m copying directly Derek Hernquist’s simple checklist, print a copy and see whether these 6 simple rules will improve my trading, just as much as it did to him and countless others:

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?

– The Faceless Trader

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