If you’ve read my article on Pareto charts, this probably makes more sense to you.
Root cause analysis is another tool that traders could take advantage of. I know some of these things don’t seem to be related to trading, but you can improve your results with them. When all is said and done, the results are what matter.
On your Pareto chart, you have identified weaknesses in your trading style. Root cause analysis is the way to start solving them.
First, we must identify the most important cause of failed operations. Once identified, you will need to write it at the top of a separate sheet of paper. You will then ask a question. What caused this reaction? Then list the answer. Now ask yourself the same question about this new answer. List it. You will keep asking yourself this for each new answer, until you can find an answer. In general, you will only be able to go 3-5 levels in depth. This is your main cause. This is the beginning of the road to trading at a loss.
When you’ve gotten to the root cause, you still have a question. How can I avoid this root problem?
If it’s an emotional issue, you may need to work to be more aware of the feeling that starts a bad decision process. When that sentiment starts to explode, exit your positions 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, otherwise he would not be in the major leagues. Some pitchers have been known to have wacky routines that they go through with every pitch. There are some pitchers who have had terrible seasons because they have lost something in their routine. His physical attributes have not changed, only his mentality. Her routine is only psychological, but the accompanying results are quite real.
Of course, if it ends up being the system, the solution is obvious, discard it.