Why traders need situational awareness | stockbee

8/01/2014

Why traders need situational awareness


SA or Situational Awareness is aviation term. 

Pilots and airlines use it all the time. The pilots are trained in SA.

It is commonly used term in aviation field. In my previous job I worked for overnight  packages delivery company which used to operate cargo plane and all pilots and managers were trained on SA.

The US Air force coined the term SA during the Vietnam war. Lot of pilots were losing SA and doing stupid things, they used to lose track of situations and surrounding and  other planes flying in formation. As a result lot of planes and  pilot were lost . So they established the SA training program.

Situational awareness  in simple language means knowing what is going on around you.

Situational Awareness. An all-encompassing term for keeping track of what’s happening when flying. SA involves knowing what your airplane is doing relative to its envelope, where your adversary is and what he’s up to, where the ground is, the status of enemy threats on the ground, and hundreds of other variables. Loss of situational awareness is often cited as a contributing factor to many military-aviation mishaps.

If you have seen the movie Topgun it is basically based on the training methodology developed during Vietnam war. United States Navy Strike Fighter Tactics Instructor program (SFTI program), more popularly known as TOPGUN was first program designed to emphasize SA for fighter pilot.

In modern plane there is lot of technology to assist pilots in SA and from time to time you will see the Air force will award contracts for SA technology development.

Why is situational awareness important in trading

The key role of a trader is to operate successfully in a complex and ever changing market environment by making appropriate decisions and taking effective action.

This includes not only responding to opportunities in the market but also to proactively anticipate markets next move.

It involves trading with awareness of overall situation and changing tactics based on situation. Situation awareness is a factor in addition to setups that good traders use to decide when to and how aggressively to use setup.

Situational Awareness allows good traders to avoid drawdowns and press their luck during good time. If you observe some of the best traders you will see they use SA to quickly move to cash or reduce size.

They proactively avoid certain periods as they can see a situation developing.

SA consists of whatever answers one currently has in mind to such questions as:

What is happening in the market?

Why is it happening?

What will happen next?

What does it mean in terms of my trading objectives?

What can I do about it?


You need to develop SA before a situation arrives.

That is why day in and day out pilots are drilled on SA.

You can not ask for exit or stop rules when in emergency.

SA can only be developed by everyday consciously working on it.

You need a mental plan for all situations.

Traders develop SA as they gain experience

SA is developed through experience and setbacks. Once you get hit couple of times you start thinking beyond just setups or when you experience prolonged slump then you become conscious of importance of SA.

Traders develop tools to read the situation. Various traders use various tools for that .

Some rely on their daily study of setups. If they do not see enough good setups or see setup deterioration they act on that information.

Some use number of accumulation and distribution days to decide on likely situation in overall market.

Some Stockbee members use breadth to decide on underlying buying and selling. $BPNYA is one of the widely used tool for that by many members. It was clearly showing selling pressure for a month while indexes were making high.



Some use the worden T2108,  which tracks % of stocks above 40 day moving average to find underlying buying or selling pressure.


I use the Market Monitor to track breadth on various time frame to decide when to be offensive and when to be defensive. I developed the tool 10-12 years ago after going through periods of drawdowns.



Situational Awareness is daily drill. 

For my style of trading I know my  swing setups work, that confidence is based on actual trades in last 14 years.

But overall market conditions can have impact on the % of trades likely to work. So SA helps you in controlling your trade pace. In good environment you want to be more aggressive. In bad conditions you want to focus on risk management.

Question I ask  daily for SA:

What is my market bias today

Is there a plan to exploit it

Is there an alternative plan

Why traders should develop SA

Once you gain success in trading for few years your next step becomes developing SA. It invariably happens as you gain experience.

A proactive approach to developing SA early in your trading career will ensure your longevity in trading world. It reduces stress as you have few surprises . It helps you reduce drawdowns.

If you are a motivated and serious traders one time effort in developing SA tools and thinking skill will pay you rich dividends. 



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