Trading with Root Cause Analysis

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Trading with Root Cause Analysis


Summary

Root cause analysis offers traders valuable insights to enhance their performance.

Introduction

For those familiar with Pareto charts, root cause analysis is another powerful tool that can improve trading results. Even if it seems unrelated to trading, understanding and implementing these techniques can lead to better outcomes.

Identifying Weaknesses

Start by using your Pareto chart to pinpoint weaknesses in your trading strategy. Root cause analysis helps you address these issues.

Steps to Conduct Root Cause Analysis

1. Identify the Main Problem: Determine the primary cause of your unsuccessful trades. Write this at the top of a new page.

2. Ask 'Why?': Below your identified problem, ask why it occurred. Write down the answer and repeat this process for every subsequent answer. Typically, you will need to dig 3-5 levels deep to find the root cause.

3. Address the Root Cause: Once you discover the root cause, the next step is to find ways to avoid it.

Solutions

- Emotional Issues: If emotions trigger poor decisions, work on self-awareness. Recognize troublesome emotions early and exit trades to avoid losses for the day.

- Psychological Barriers: Establish a routine that suits you. Like a major league baseball pitcher who relies on a consistent routine for success, your trading mindset can greatly affect your outcomes. A disrupted routine can significantly impact performance, even if physical capabilities remain unchanged.

- System Flaws: If your trading system is flawed, consider revisiting or replacing it.

Conclusion

Root cause analysis unearths underlying issues in your trading approach, allowing you to make informed adjustments. With these improvements, you can enhance your trading results and avoid avoidable pitfalls.

You can find the original non-AI version of this article here: Trading with Root Cause Analysis.

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