The Right Stuff – Pilots and Traders

Many readers of this blog are aware that I am also a commercial pilot. It continues to amaze me that so many of the skills that I have learned as a pilot can be easily and advantageously transported to the trading workflow. Even if you are not an aviator, the correlations are worth reviewing and they should be considered by all traders.

One of the skills that pilots are taught from their very first flight is the use of checklists. Checklists help to ensure consistency and completeness in carrying out of critical tasks required for the safe and proper operation of the aircraft. Even the most experienced pilots utilize written checklists in the cockpits. Unfortunately, complacency is part of human nature. Some people understand the tedious nature of checklists and accept it, however, others often defy it. In fact, the improper use, or the non-use, of the checklist by flight crews is often cited as a major contributing factor to aircraft accidents. So why don’t pilots always use checklists? Probably because they don’t expect anything bad to happen as a result of failing to utilize the checklist. Maybe in the past they have forgotten a checklist or a checklist item and nothing bad has happened, which reinforces the pilot’s belief that his skills are infallible.

Traders can use checklists as well to determine if a particular trade meets their specific criteria for entry. If the trade does not meet all of the criteria in the checklist, you do not enter the trade. Many of the “gurus” that engage in high-probability trading state that you must “trade small, trade often.” Their theory is that if you place enough high-probability trades, the statistics will work out in your favor. This is beneficial to the brokerage firms, but I do not believe that it is practical for the small retail trader. I prefer “trade small, trade smart.” Don’t place a trade that does not meet all your criteria in hopes that the numbers will “work themselves out over time”. Always remember to run your trade checklist prior to entering every trade.

When in-flight emergencies occur, the pilot is taught to complete a series of procedures that are specific to that emergency. Usually there are some time-critical memory items that are completed first and then the checklist is pulled out and utilized for the remainder of the procedure. For example, when the master warning light illuminates indicating that a fire has developed in one of the engines of a jet aircraft, the pilot immediately closes the thrust lever for that engine, shuts off the fuel to that engine and then engages the fire suppression system. At that point, the checklist is called for and the remainder of the procedure is completed utilizing the checklist. Pilots are trained in these procedures and repeat them over and over until they become second nature. When these rare events occur in reality, the pilot is not startled or frightened, nor does panic set in. He just goes to work and does what needs to be done to ensure a safe outcome.

One of the biggest obstacles to profitable trading is fear. When trades start to move against us, we often become paralyzed by fear and stare at our screens watching each and every tick as the situation unravels and continues to get worse. This would be like the pilot that just stares at the flames coming out of the engine compartment and is unable to function due to fear. As traders, we need to have our own master warning system that, once triggered, results in execution of a specific procedure to protect our assets. This might be a trade adjustment or possibly exiting the trade completely with a small loss. The important takeaways are that the “procedure” should be determined and in place prior to entering the trade, and the procedure should be executed every time the trigger occurs. Live to trade another day.

Of course, we should not forget the wisdom of the iconic pilot, Chuck Yeager, who said, “There’s no such thing as a natural born pilot.” Just as a good pilot is always learning, good traders should never stop working to perfect their craft. Unfortunately, many “traders” have early success due to dumb luck and develop a false sense of expertise. I have often joked that I could teach a monkey to fly, but it is the decision-making abilities that set human pilots apart from their primate counterparts. Success depends on your ability to do the right thing when bad things happen.

  • Tom Madine

    One of your best, Aram!

    • Aram Basmadjian

      Thanks, Tom!