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If you’ve read my article on Pareto charts, this one will probably make more sense to you.
Root cause analysis is another tool that traders can use. I know some of this stuff doesn’t seem to be related to trading, but you can improve your results with it. When all is said and done, results are what count.
In the Pareto chart, you have identified weaknesses in your trading style. Root cause analysis is how you begin to fix them.
First, we need to identify the most obvious cause of your failed trades. Once you have identified this cause, write it down at the top of a separate sheet of paper. Below that, ask the question. What caused this reaction? Then write out the answer. Now ask yourself the same question about this new response. List it. You will continue to ask yourself this for each new response until you can’t come up with an answer. Generally, you will only be able to go down 3-5 levels. This is your root cause. This is the beginning of the path that leads to a losing deal.
When you have reached the root cause, you have another question. How can I avoid this problem?
If it is an emotional problem, perhaps, you need to work to become more aware of the feeling that starts the process of bad decisions. When this feeling starts to arise, simply get out of your position and stop trading for the day. It is better not to trade than to trade and lose.
If the problem is psychological, you may need to find a routine that works for you.
A good example of this is a baseball pitcher. A major league pitcher has all the physical requirements or he wouldn’t be in the majors. Some pitchers have been known to have strange routines that they go through on every pitch. Some pitchers had terrible seasons because they lost something in their routine. Their physical attributes have not changed, only their minds. Their routine is only psychological, but the results of that being off are all too real.
Of course, if it ends up being a system fix is obvious, scrap it.
