Systems Thinking For Traders


How to Use Systems Thinking
to Improve Your Trade Craft

Most traders think tactically – chart patterns, orders, right now or today. Systems thinking typically doesn’t enter their world.


Actually, that’s quite normal – and not just for traders. Very few people even know what the term “systems thinking” means and fewer still can actually think systematically. In fact, research in the area has shown that less than 10% of the population is able to think systematically.


Being able to think systematically, however, is a great edge for traders. Why? Capital markets are complex, dynamic, and adaptive systems. Individual traders are also complex, dynamic and adaptive systems themselves. Do you think systematically about those? If not, the markets are quite efficient at draining the accounts of unprepared participants.


There’s good news, though — you can learn how to start thinking systematically and you can develop your systems thinking mindset to gain an important edge in the markets.

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What is Systems Thinking? And Why Should Traders Care?

I studied an online course recently covering historical figures who were great systems thinkers.  I immediately realized how much a systems thinking approach would help traders. I also immediately thought of Ken who is a subject matter expert in systems thinking and who happens to be an outstanding instructor. After a brief introduction of the idea, Ken was quick to accept the task of creating this new workshop and he has a great agenda prepared for you.Van K. Tharp


Systems thinking is not one simple idea but rather a combination of subjects.

As a very brief overview, you might think of systems thinking as:

An integrated body of knowledge, a discipline
A whole host of ideas and subjects make up systems thinking and they relate directly to the market, to your systems, to yourself. Being able to integrate multiple conceptual areas into a holistic understanding enables more effective and faster decision making processes.  


A mindset, a way of looking at the markets and trading
Most traders think and operate at the tactical level but there’s a huge edge for those who can grasp a broader and interconnected view of the world, themselves, and the markets. Integrating those multiple outlooks in their trading helps traders improve their results by coordinating their individual trades with the market while perceiving emerging areas of opportunity or threat.


A process
Systems thinking is not addressing issues on an ad-hoc basis nor is it an intermittent recurrence. It is a recurring and an iterative process requiring inputs and providing outputs. Inputs include changes in yourself, in market conditions, your results to date in relation to your objectives, and more. The outputs include informed information about what systems to use, what position sizing strategies to employ, how much discretion might be allowed, and much more.


Inseparable from execution
Just as generals must keep the capabilities of their forces in mind as they plan campaigns, traders have to think about their level of capital, their broker, their personal abilities and preferences, as well as other trading capabilities. Plans fail in execution – or earlier in the planning process where the planner doesn’t have a strong grasp of the execution capabilities. Traders who are clear about their execution capabilities are clear in how they think through scenarios and needed actions to reach their objectives.


A set of skills that can be taught and learned
Systems thinking is not a special talent endowed to only a few gifted individuals. As a body of knowledge, systems thinking can be studied, taught and learned. In this workshop, you will have the opportunity to accelerate your learning process from a master practitioner and instructor.

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Main Subject Areas Covered

Input -> Process -> Output
This is a critical element of systems thinking and trading as you might imagine. In the workshop, however, it becomes the construct for trading activities as well as thinking. We start with the output and then consider the best inputs and processes for effective and efficient generation.

Systems Planning Framework
In this portion of the workshop, we adapt a highly useful and well respected systems planning framework from the Harvard Business Review to our process of assessing the current state of volatility and uncertainty in the market as revealed by our indicators. With our assessment, we can then more effectively choose an appropriate response in the form of specific systems, position sizing strategies, and trades.


Mintzberg on “Management”
Henry Mintzberg is a global thought leader in business management and we study his views on the role of systems in management. Mintzberg views management as an integration of three kinds of activities: science, art and craft. Successful managers have skills in each of these areas and an ability to integrate them into a practical holistic practice. We find this perspective helpful as we design our trading practice to leverage each of these disciplines. We need science to manage those issues that can be structured and reasoned with; art to describe our intuitive insights and turn them into actionable, reliable processes; craft, in order to standardize, and simplify our processes. The Mintzberg model helps us keep our trading process management.


Adaptive systems inevitably generate a variety of insights that must be assessed, evaluated and implemented when there seems to be a payoff. The Japanese manufacturing management system named Kanban turns out to be a particularly effective way of keeping track of work in progress and helps the trader quickly stay focused on just those things that need to be done now in order to keep a trading system operating both efficiently and effectively. It is a particularly powerful way to look at our own work-flow as a system. Ken uses this method when coaching his students who find this to be an especially useful practice for organizing their workload.


Effective strategies are less planned than more often simply emerge from attention to the craft of trading. What, however, can help you notice and adapt? We will cover several processes that support the identification and adaptation of additional information in evolving your strategies.

Ken organizes his Tortoise trading practices in a 4-stage hierarchy: Strategies – Systems – Techniques – Tips. At the broadest level, strategies provide a robust set of beliefs, assumptions and perspectives that allow us to engage with the market when it exhibits a particular set of conditions. Systems are the next level down where we apply a strict set of rules and parameters to systematically engage the market in a mechanical way (or with carefully defined and compartmentalized trader discretion). Techniques are the next level down and are procedures or processes that are applicable to many different systems and which can be used to rapidly prototype new strategies and systems based on our insights from observing the market. Tips are individual best practices or ideas that can be utilized in a variety of situations.


Craft has typically been an under appreciated aspect of trading. It refers to the knowledge about, or experience in, the profession of trading that also calls on the science and art aspects. Craft applies to any skilled activity – including trading.

Checklists are incredibly effective and typically undervalued tools. If fighter pilots and astronauts rely on them, are they good enough for your trading?

HRO (High Reliability Organizations) Operational Principles
Traders can learn some valuable lessons from “high reliability organizations” or HROs. HROs are groups where failure is so costly (think firefighting) that everything about them is designed for effectiveness and survival. By adopting these principles to the trading environment, traders can improve their risk management significantly. The five qualities of HROs have been valuable across many different business domains and have proven especially useful for traders.

Mental Models
Van Tharp has always been a big proponent of constructing mental models. You’ll learn how to make the concept practical, simple, and very useful for your trading.

Critical Thinking
Critical thinking is a disciplined way of examining information and acting on that information. Critical thinking supports systems thinking in numerous important ways.

Using Metaphors
Metaphors are a well-known technique in NLP as they use elements of language and imagery to help produce cognitive and behavioral results. After this portion of the workshop, you will be able to benefit from effective metaphor creation for various aspects of your trading practice.

Mind-Mapping, Sketching

A useful technique for translating concepts into helpful diagrams that are usable and memorable.
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Systems Thinking – Some Individual Concepts

1. Nature favors robust systems that can sense and respond and adapt while it destroys fragile closed, non-adaptive systems. The capital markets do the same, so focus on developing robust, adaptive trading systems, strategies and support systems.


2. For traders, the best is the enemy of the good (or good enough) so stop wasting time pursuing perfection and learn to succeed with good enough.


3. Adaptive systems are able to manage risk carefully and rely on many minor adaptations made over many short cycles to remain in sync with the market.


4. Systems theory offers many useful metaphors and analogies that can be exploited by traders.


5. Systems in general, and good trading systems specifically, are built on well-defined, multi-use, general purpose components and processes that can be used in multiple strategies.


6. Mindful, reflective practice will improve system and component performance on an ongoing basis.


7. Van’s Top Tasks of Trading are a great example of mindful systems thinking.


8. Most systems are nested in hierarchies: a system can be a sub-system of a higher order model/system.  


9. The individual components of a system can themselves be a full functioning system.


10. Basic systems operate on an Input-Process-Output model, in an Environment that affects performance but which cannot be directly controlled by the system


11. Robust systems use feedback loops to learn and adapt.


12. Systems can be designed to learn at different rates and should be tuned to the rate of change in their environment so that they change as fast as needed — but not faster.


13. Insights and techniques are gathered from the worlds of art, human factors, leadership, management, engineering, manufacturing, sports, mathematics, gardening and research can all be profitably applied to making a robust trading enterprise.


14. Systems thinking can be applied to self-development as a mindful, learning student of the market as you develop your craft knowledge.


15. Improving your craft knowledge improves all operations downstream and can be used to improve current operations, and develop a better understanding of past operations.


16. For a better understanding of your counter-party and for better scenario planning, consider how the trader who takes the other side of the trade sees the same price action and has the opposite action as you.
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Workshop Learning Path

The workshop is divided into a few main areas that will proceed through the following sequence:


A. Overview of systems thinking


B. Systems thinking defined


C. Analyzing systems at the strategic, operational and tactical level of work


D. Applying systems thinking to Self, Systems and Market


E. Understanding systems thinking through the lens of "Systems-Strategies-Techniques-Tips" which are all forms of craft knowledge.


F. Using systems thinking to develop a robust trading enterprise (or process model). We will listen to the House of Trading video.


G. How to improve:

a. Self and performance

b. Processes (like creating a daily trading plan, preparing the plan, posturing for good execution, improving assessment and
    debriefing, and learning)

c. The use of standard forms and templates to standardize performance of routine tasks and gain efficiency and momentum

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Systems Thinking Processes You Will Learn: 

1. Plan-Prepare-Execute-Assess Process


2. Organizing your workspace (time of day and application of strategy and management)

3. House of trading

4. Holistic view of timeframes and overlaps

5. System-Self-Market integration model

6. Staff call and management of parts

7. Input-process-output + environment: SIPOC systems thinking

8. OODA loop for decision-transaction processing

9. 10 minute mental toughness + zero state exercise

10. Systematic process improvement through use of 30-60-90 trade MA

11. Four part learning journal

12. Virtuous circle for continuous improvement

13. Clearing and sense making meditation

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Pre-Workshop Assignments: 

In preparation for the workshop and to maximize the classroom time with Ken, students will have some pre-course work to complete. Intended assignments include:


a. Self-assessment on learning style

b. Introduction to the four-part learning journal

c. Completing a goals worksheet

d. The house of trading exercise

e. Emotional state management exercise

f. Mapping your own process for trade planning “as is” which includes preparing/executing/assessing

g. Reviewing an overview of systems thinking


In addition, after the workshop, there will be a series of follow-up assignments: monthly check-ins for three months to track post workshop goals (developed in the last day of the workshop along with accountability partners in small teams).

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Benefits of the Workshop

How will you benefit from attending this Systems Thinking Workshop?

  • Learn to plan your trading business and plan your trades more effectively for achieving the results you are trying to generate.
  • Improve the probabilities for your success in trading.
  • Find out what key questions to ask in order to challenge your established market beliefs, logic, and mental structures for trading.
  • Create a series of useful tactical checklists for daily and weekly use so you don’t miss common crucial items and keep your trading efficiency very high.
  • Gain invaluable lessons from practicing systems thinking.
  • Identify the few critical states in price action and how to plan how to take advantage of those when you find them.
  • Develop your situational awareness skills by simply paying attention to what’s happening in order to evolve your strategy as well as exploit new opportunities.
  • Understand how to construct trade scenarios in order to anticipate possible outcomes and reduce the chances for a “surprise”.
  • Clarify your objectives and understand how your long term plans, your big picture process, and expecting the unexpected, all support you getting to those objectives.
  • Feel more confident in your trading regardless of what the markets are doing.  
  • Improve your decision making processes for faster execution with results more aligned with your goals.
  • Ultimately – feel better about your trading and improve your returns.


These are all things that are the natural outcomes of a systems thinking orientation as applied to trading. These are the things that the members of the tortoise community of practice and the chatroom have been doing to improve their trading on explicit systems developed by Ken and through the community collaboration.


This new three-day workshop will not only have extensive pre-work that will give you a head start on the material, but Ken will have dozens of practical exercise for the class which he has already field tested within his trading group. All of the exercises and three days of presentation will focus on helping you realize how important this mindset is for your own trading and developing your systems thinking orientation and how to capitalize on this important factor.

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A Final Note From Van Tharp

Our mission at the Van Tharp Institute is transformation through the trading metaphor. I believe this workshop promises a number of transformations for traders and I expect it to shift a lot of your paradigms. It will transform the way that you perceive and think about markets, your trading systems, your trading business, and possibly even your-self. We are lucky too because I can’t think of a better person in the world to teach the course than Ken. I expect the workshop to be so great that I’ll be attending it as a student.  
— Van

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Helpful videos from Ken Long

van tharp
Ken describes some of the overall advantages of understanding how to think systematically in this 9 minute video. Interestingly, he explains how this kind of thinking helped him trade successfully through late 2015 and early 2016.
van tharp In this 14 minute video, Ken takes you through a short exercise about what you see and how you interpret what you see. The short exercise demonstrates how your perceptions are actually a piece of a much broader and systematic view.
van tharp Ken describes in detail his view of a top down holistic view of a trading enterprise in this 17 minute presentation. Ken incorporates numerous aspects of a trading business into an integrated conceptual diagram and then he takes you through each element to.
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