Friday, October 30, 2009

Trading and John Boyd

From an article published in the September, 2002 issue of SFO magazine.

When Linda [Raschke] needed a model for guiding her recent training project for traders, she did not turn to the fields of finance or psychology. Rather, she turned to the military and the writings of Colonel John R. Boyd.
============ From the article:

Col. Boyd of the Air Force was a fighter pilot known for his challenge to fellow airmen. He allowed himself to be placed in a position of tactical disadvantage in an airfight and promised that, within 40 seconds, he would be on his adversary's tail, ready for the kill. Col. Boyd was never known to have lost this bet, earning him the nickname "Forty Second" Boyd.

During his career, Col. Boyd developed his approach to airborne combat into a comprehensive philosophy of military strategy. He described combat decision-making as a function of Observing, Orienting , Deciding, and Acting (OODA). These processes form loops, with new actions providing fresh observations and requiring renewed efforts at orienting and responding. The goal of military training, Boyd stressed, is to accelerate OODA loops, becoming more efficient than the enemy.

Trading futures and options requires especially tight OODA loops. There is always new action to Observe across multiple markets and indicators. This requires an ability to rapidly Orient and assess whether we are in trending or non-trending markets, volatile conditions or non-volatile, near support/resistance or away from it, etc. From our Orientation, we must rapidly create and update trading Decisions and then find the will and clarity to Act on these plans.

Ask yourself: Am I preparing myself to trade like Col. Boyd? Am I training myself to observe my market data, size up the action, craft a trading plan, and execute it all within a matter of seconds?

A glance through the Ranger Handbook offers some helpful clues as to how this might be accomplished. Much of the book is taken up with descriptions of drills and procedures, each broken down into easily identifiable components. By breaking complex processes down into clear components that can be reviewed and rehearsed, the Army ensures that they are in "an instinctive and familiar way of thinking for a platoon leader."

Making complex skills instinctive and familiar is the key to tightening OODA loops. Col. Boyd could never have overcome his adversaries in forty seconds if he had to consciously analyze and plan each of his maneuvers. It was because these maneuvers were overlearned to the point of becoming automatic that he was able to operate within his opponent's mindset.

Elite traders of futures and options also need to make complex decisions within a time frame measured in seconds. This can only happen if they have broken their trading down into easily identifiable processes that can then be rehearsed under pressure until they are second nature. The process of development being followed in Linda's training project can be described in three stages:

Skill – A trading skill or pattern to trade is taught to the trader or identified by the trader as having profit potential. This corresponds to the Observe phase in Boyd's OODA loop.

Drill – The trading skill or pattern is rehearsed, first via walk-throughs (simulated trades on historical data) and then by paper trading live markets. The trader learns to recognize opportunities to utilize the skills and patterns as trading conditions unfold and formulate trading plans based upon the incoming data. This corresponds to the Orient and Decide phases of Boyd's loop.

Fulfill – The trader's development culminates in the fulfillment of actual trades in real time utilizing the entry, exit, and money management skills that have been rehearsed. This provides practice in "pulling the trigger" on one's decisions: the Act phase of Boyd's loop.