Trade Like a Fighter Pilot

He's one of history's great military strategists, but you likely haven't heard of him...

Colonel John Boyd was born in Erie, Pennsylvania, and joined the Army Air Corps in 1944, while he was still in high school. After graduating from the University of Iowa, he was commissioned into the Air Force during the Korean War and flew a short tour (22 missions) where he never claimed a kill or even fired his guns.

After Korea, he was assigned to the Air Force's Weapons School, where he graduated at the top of his class and became one of the most influential instructors – writing the school's tactics manual. Boyd developed a concept called "OODA," which stands for: observe, orient, decide, act.

These were four steps that Boyd applied to combat operations... But today, the concept applies to fields beyond military strategy – including business and law enforcement. They also happen to be four great steps to think about while investing – especially in crazy markets like today.

So this Monday in HX Daily, let's take a look at each and see how they apply to trading:

Observe

The first step is to build a comprehensive picture of the situation with as much accuracy as possible. For a fighter pilot, this can mean understanding who the enemy is, how many planes there are, what type of equipment is being used, what the weather is like, etc.

For trading, it means understanding what kind of market you're in – a bull, a bear, a correction, low volatility, high volatility, etc. It also means understanding what kind of asset you're trading and how it has been responding to the current environment.

Information alone isn't enough. You also need to think about the meaning of the information and decide what is relevant – context is everything.

Orient

This step is the most complicated... and it's about understanding what's truly important and what isn't in the situation. It's critical to build a plan around trading that's rooted in reality, as opposed to your biases.

Another way to think of this is to pause to consider your biases...

Boyd used an example of a snowmobile. It's a vehicle built from many disparate elements: treads like a tank, skis, a boat motor, and the handlebars of a bike. By themselves, these elements are useless... but together, they create a functional vehicle.

As Boyd explained...

My version of this is to focus on what works in trading, not what you want to work.

Decide

This one is fairly straightforward – make a plan!

Here at HX Daily, this concept is the first half of my favorite saying: Plan the trade.

Once you've analyzed your situation and worked to understand your biases with a goal of developing a pragmatic and realistic view – you decide on a plan to execute.

Act

This is the next part of my favorite saying: Trade the plan.

Now, you execute what you've set out to do. Discipline is key in making sure you stick to your (hopefully) well-thought-out plan.

With trading, the best way to think about this methodology is through constant application. Every time you're looking to make a trade, go through this process.

As you see the results of your actions, do an analysis of what worked and what didn't and try to determine why it did or did not. This is an iterative process.

The tactics that have guided our fighter pilots for the past 50 years can also help improve your trading... so keep this approach in mind.