The Pre-Mortem: A Simple Technique To Improve your Trading Performance

"By failing to prepare, you are preparing to fail." Benjamin Franklin

The Pre-Mortem is a little-known tool which traders can use to help improve how they plan their trades, and which has the benefit of countering biases and overconfidence. 

What is a Pre-Mortem?

You are probably familiar with the term post-mortem, the process used in medical settings to determine cause of death. Many traders also carry out post-mortems on their trading after significant ‘Trading Failures’. The Pre-Mortem turns that process on its head by allowing traders to be more aware of their propensity for mistakes and errors of judgement, and thus reduces the number of failures they suffer.

The Pre-Mortem Process

Ahead of a trade, a trader would typically assume their trade is going to succeed, otherwise why would they do it. But when doing a pre-mortem, a trader assumes the trade fails and then explores possible reasons for that failure.

There are many reasons for trades failing whether a trader make a right or wrong call on the market. Our article ‘Trading Crimes against Your Self’ lists many of the behaviours which traders engage in which leads to failures.

A trader notes down the key reasons why they think a trade may fail, then they home-in on the reasons they feel are most likely or most potentially damaging. They then bring this into their planning process for the trade in a way which allows them to strengthen their plan.

Pre-Mortem Thinking 

The realities of trading are that doing a full pre-mortem on every trade is not feasible, particularly for the active day trader. However, bringing ‘pre-mortem thinking’ into their mindset is a habit a trader can cultivate and develop.

Some clients, who I liken to snipers, demonstrate examples of pre-mortem thinking. I liken them to snipers because their finger is always on the trigger ready to pull, but unless they can leave the scene without being discovered and shot themselves, they won’t take the shot. – This is what snipers do: They are always carrying out a pre-mortem before they shoot. ‘will the shot reveal my positions’, ‘can I get out of here unnoticed’, ‘If I do shoot, what are the odds of success?’. 

Real examples of the Pre-Mortem to Trading and Investment.
Client A was a short-term trader on the FX desk at a bank. Amongst his issues were elevated levels of fear which were obscuring clarity around his trading and lead to erratic execution. Though making money, his performance was adequate rather than outstanding. Due to the short-term trading requirement of his work, rather do a pre-mortem on every trade he decided to do it at the start of every day. – His pre-mortem process involved putting forward the following two propositions:

• ‘Over the coming day my trades suffered losses far bigger than I had committed to at inception’.

• ‘The markets moved in the right direction, but I failed to capitalise on this to the extent that I should have’.

He would then theorise the possible reasons why this may have happened?

Once he had identified some reasons, he would then write down and keep them to mind, and try to ensure his process was more robust through the day.

By doing this, he started to become aware of behaviours which were impacting his performance. Overtime, this awareness led to him re-calibrating some of his processes to take account of his tendencies toward these sub-optimal behaviours. This subsequently saw a dramatic improvement in his performance on a consistent basis, which is still going strong.

Client B was a Hedge Fund options trader. He used a quantitative systematic approach in his work, creating elaborate models and thoroughly back-testing his ideas. His whole process appeared highly automated, yet at the core there was a significant discretionary element. In reviewing his process and trades and looking at examples over many years a pattern was becoming clear. He would start to fall ‘in love’ with certain ideas or views to the extent to that this would start to obscure his objectivity.

By encouraging the trader to bring ‘Pre-Mortem’ thinking into his working approach, he started to counter this behaviour. The client ran a ‘Pre-Mortem’ ahead of all stages of his process. He would take the assumption that the idea had failed, and this left him with a loss or a sub-par outcome.

The consequence of this was that quite a few more ideas were rejected after spending time on them. He realised that in the past he had become a victim of the ‘Sunk Cost Fallacy’: A behaviour whereby having committed time, effort and investment to something, a person continues with it even though it is a bad idea.

Consequently, he was now able to spend more time on good ideas and was more objective about his processes. He also had more real and genuine confidence in the ideas he was working on. – The result was a big improvement in trading performance.

Summary

I encourage traders at all levels and of all types to start using a ‘Pre-Mortem’, to cultivate ‘Pre-Mortem’ thinking and to bring it into their habitual ways of working. The great South African golfer Gary Player once said, ‘Luck is what happens when preparation meets opportunity’, the pre-mortem ensures that when luck meets opportunity, the trader is better prepared for it. 

Article by Steven Goldstein

Steven Goldstein is a Performance, Team and Executive Coach who focuses on helping improve the 'mindset' aspects of Risk and Financial Markets' people and businesses.

Core to Steven's work is the belief that everyone has the potential, often latent or hidden within them, to surpass where they are and to grow into what they want to be. He views trading as two concurrent battles a person engages in; one with the markets and one with their self. To succeed a person must win both. As a coach, Steven works predominantly on helping his clients win the battle with their self.  

Prior to becoming a coach Steven worked for more than 20 years as a Rates and FX trader at some of the world’s leading investment banks. See Steven's Full Profile.

If you are curious about how Steven could help you or your business, please email him at info@alpharcubed.com. or call +44 (0)7753 446097. 

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