How to thrive in chaos - A 4 step framework for success
How to thrive in chaos - A 4 step framework for success
Chaos - origin, Greek - meaning, that which gapes wide open
The world can be chaotic.
Anything can happen. It's wide open. Markets and trading can be chaotic. Surprises happen everyday providing vast opportunity and producing troublesome risk. Having a proven, repeatable process is crucial.
The first step is to define the situation.
VUCA
Chaos can be broken down into four parts; volatility, uncertainty, complexity, and ambiguity. Or VUCA
Volatile
A tendency toward rapid and unexpected change
Trading application
Volatility is such a profound market concept that is measured constantly
Uncertain
A wide range of potential outcomes making accurate prediction impossible
Trading application
We never know what a stock may do
Complex
Many various interconnected influencing factors
Trading application
Endless amounts of information factor into price
Ambiguous
Lacking clarity, without precedent, many unknowns
Trading application
We never have complete information
The OODA Loop
The OODA loop is a concept developed by Colonel John Boyd of the United States Air Force. It is a method of conflict resolution defined as feedback loop in four parts. Each one feeds forward to the next in an repeatable cycle until the conflict is resolved.
Observe
What is happening? Start forming a picture that frames the situation.
What a trader sees
What is the current overall state of the market?
What is happening with the stocks on my watchlist?
Orient
How does this affect me? What are the potential outcomes? How should I respond? What actions are available to me?
What a trader sees
What is the opportunity?
Is there a potential trade setup?
Are there risks to my open positions that need to be addressed?
Decide
Choose how you will respond and commit to action
What a trader sees
Write game plans for each potential trading setup
Update risk management plans as needed
Act
Test your actions. See what happens next. Start again observing the outcomes and the new information produced.
What a trader sees
Take trades
Trim profitable positions
Trail your stops
Follow your game plan
Reduce stress and be more confident by using this framework.
Using the OODA loop takes chaos (VUCA) and adds focus and action. Focus and action reduce stress and anxiety. Reducing stress and anxiety leads smarter trading. Smarter trading leads to success.
Image courtesy of: By Patrick Edwin Moran - Own work, CC BY 3.0, https://commons.wikimedia.org/w/index.php?curid=3904554