Jan

11

Air Traffic control roomAs an air traffic controller and pilot it was only a matter of time before I chimed in here. Victor has, once again, brought up a veritable feast of food for thought here and I will be mulling over this post for some time to come.

Checklists are important in aviation for a few reasons. Task load is high in aviation and the most important role of a checklist is to ensure that a critical step is not skipped, forgotten, overlooked or done in the wrong sequence. High task load arises from the fact that aviation systems tend to be very, very complex and sequence of events is critical in and of itself so lists keep things in the right order. Lists take a complicated set of instructions and break them down into simple steps. Lists can build teamwork and improve execution. Some interesting tidbits. A & P's (Airframe and Powerplant Mechanics), the folks that keep aircraft flying, are required to inventory their toolkits prior to and after maintenance procedures to ensure that they haven't left any tools in the aircraft as this can have disasterous effects. I have heard anecdotally that some surgeries require the same procedure as, in the not so distant past, it was not terribly uncommon to discover that instruments had been left inside the patient.

It is important when formulating checklists to find a balance between not being too general and too minute. Steps that are too broad in scope increase the risk that critical steps may be omitted, these types of ideas are good for setting up strategy, not tactics. Lists that are too long or whose steps are phrased in too lengthy a manner tend to be glanced over and not given their due attention. This happens to be a problem with the checklists we use in air traffic control when releasing control of a sector to the controller relieving us. Good controllers know how to cover the important information with proper emphasis and how to roll up the "does not apply" stuff into a catch-all at the end of the briefing. It is important when working with others to know how to use emphasis to ensure that you have conveyed the criticality of the information you are delivering. The FAA is forever focusing on covering its legal rear end without working on discovering the meat, the nature of the truly important stuff. Although recent initiatives seem to be working toward a thoughtful approach toward these problems.

As a pilot and controller it was, again, only a matter of time before I began taking proven memes from my industry and applying them to trading. Many of the procedures that Chair outlines are strategic, like having workarounds ready for equipment failures, getting enough sleep, eating healthy, understanding your goals or defining your method. One may be well advised to have strategic checklists and tactical checklists and to realize that they may overlap a bit. In addition to my basic concept or framework, I have three trading checklists that I use tactically for entering, maintaining and exiting trades. Some of the steps I use include:

1. predefining my total risk.
2. ensuring that I am using one of the rules I have created that justify entering a trade. (Same for exits.) This is designed to keep my impulses in line.
3. creating a plan for the trade that includes money management, position sizing and some thoughts about how to exit. Thus my exit checklist has some flexibilities built in with other parts, like total risk, inviolable.
4. prior to execution, double checking that I have entered the correct instrument and expiration, and correct number of shares or contracts. A simple typo can be devastating.
5. making sure that I am familiar with the specifications and margin requirements of the instrument.
6. calculating the amount of profit or loss each point (or basis) rise or drop will cause and ensuring that my predefined risk limits trigger an exit, regardless of other rules. My theory here is that I can always re-enter the position if my original theory is reiterated or reinforced. I have listened carefully to Chair about the use of stops and must respectfully submit that when my position needs defending, my purposes tend to be best served by the clearness of head that arises from nullifying the position either partially or completely and reanalyzing at that point. I lack the sangfroid that comes with experience and know that this method works for me and I accept the costs associated with it. And this is, after all, my emergency escape route.
7. maintenance or surveillance of a trade can include rules for increasing position size to press my advantage in a trade or getting smaller to tactically retreat.
8. logging trades along with reasons in a journal, with technical specifics and a discussion of my thinking. Upon exit, I always include a sub heading titled LESSONS to spell out lessons learned. I place the ones I deem important in bold typeface so they pop out at me when skimming through the journal for my re-edification.

The use of checklists has given my trading a feeling of professionalism that it lacked in the past. I no longer feel that I am trading on the fly or for ill defined reasons. I have Chair and this auspicious body to thank for most of that.

Lastly, here is an interesting bit about checklists from Afterburner Inc. 


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