Standing in a queue to board the plane at the gate, my children’s minds – never far from a gruesome scenario – turned to plane crashes. They started discussing the possibility of their and their fellow passengers’ imminent deaths, probably a bit too loudly for some more nervous fliers’ comfort.
I asked them what they thought the chances of an accident were, to which my youngest replied that plane travel was actually very safe, and there was probably about 99% chance that we’d all be fine.
“So, if you flew 100 times, there’s a good chance one of those planes would go down?” I asked.
He mulled this over. “Maybe it’s 99.9% safe?”
The actual figure is closer to 1 in every 11 million flights, with a lot of variation between airlines.
Human beings are dreadful at thinking about probabilities and managing risk in the modern world. Evolution just hasn’t built our brains that way.
But there are ways – some of them stolen from air travel – to make our trades much safer. Maybe not 1-in-11,000,000 safe … or even 99.9% safe – but we can close down a lot of the risks.
How safe is your trading?
You might say that you’ve a success rate of 65% on your trades. Is that your safety rating?
Or perhaps you’ve only ever deviated 15% away from that 65% success rate on any given month – could that be a measure of how safe your trading is?
Both of these are good stats to have … but, to be really safe, we need to plan for unexpected scenarios in the future – not just ones we know have happened in the past.
In air travel, pilots run through lengthy checklists and plan for many scenarios, even ones that seem very unlikely.
By bringing this approach to our trades, we can plug up potential holes we could fall into. These ‘checklists’ fall into 4 categories …
Does your signal meet the grade?
On the whole, as traders, we love getting signals. They make the pound signs spin in our eyes like a cartoon villain. But the reality is that signals are common as mud – there are plenty of them. What there’s a shortage of are great signals. So there’s no reason to accept sub-standard signals. If you’re not sure about it – just sit this one out. There’ll be another one along soon enough.
I’m not talking about technical analysis here – I’m talking about the software and hardware we use to actually place and manage our trades. While most of the time, these tend to be very reliable, we should never get complacent when our money’s on the line.
Although, to be fair, problems with EAs are often down to user error …
It’s easy to make mistakes in our trades – even if we’re using MT4 software to run things for us. Checkboxes left unchecked … a decimal point in the wrong place … these details are important.
Of course, no checklist can prepare us for every scenario …
Even when we’ve meticulously run through our checklists, things can still go wrong, and risk-management is all about planning for the unexpected.
For the pilot, it’s knowing exactly what you need to do when you have complete instrument failure … you’ve just a compass to go by … you’re in a thunderstorm … and there are deadly snakes sliding around the cockpit …
(That may be from a disaster movie rather than a genuine flight-simulator scenario.)
For the trader, it’s about knowing what you’ll do if …
In thinking about what could go wrong – the only limits are your imagination!
And these questions need more than a tick in a box – they need a plan for how you’ll behave and limit the damage. This kind of scenario is what allows pilots to calmly run through procedures in an emergency, rather than panic and give a knee-jerk response.
That calm, measured response is exactly how we want to be able to react when things go wrong with our trades. It takes planning.
Of course, checklists and disaster-planning won’t make you a winning trader on their own. You’ll need a good trading strategy for that.
But many, many great trading strategies fail because of errors implementing them and bad risk management.
Most of us could look through our trading histories and pick out multiple mistakes we’ve made … trades we staked wrong, trades we forgot to close, trades we should never have taken if we’d stuck to our rules. And, generally, these mistakes cost us money.
A simple checklist, along with some risk-planning can cancel out these losses, and has the power to boost your results, and even turn around a failing trading system.
JOIN US ...
Get exclusive access to members-only resources, plus my weekly email updates ...
I will NEVER share your details for marketing purposes. Privacy policy
