Lessons from Dr. Mansi: Situational Awareness
Simplifying a critical input for your trading plans
Since the market has lately been teaching us that there’s more to trading than just setups, I’m carrying on with Dr. Mansi’s “How I trade” series. Specifically, “How I practice Situational Awareness”.
Today’s notes cover:
What situational awareness is, and why it’s important;
The three factors Dr. Mansi analyses;
How to use your analysis for your trading plans; and
A Druckenmiller lesson on achieving superperformance that I believe relevant for today’s discussion.
Please do follow Dr. Mansi on X/Twitter and subscribe to her YouTube channel if you aren’t already!
All roads lead to Rome
Many people practise situational awareness (1:57). It’s only natural — it’s a key part of trading, and plays a critical role in determining the odds of a trade working, particularly if you’re a trend follower.
However, in Dr. Mansi’s experience, no matter how you practise situational awareness, people tend to arrive at the same conclusions. That pretty much aligns with what I’ve seen too, if my X/Twitter feed is anything to go by.
Anyhow, today’s notes address how Dr. Mansi practises situational awareness. For a slightly different take on it, take a look at my Qullamaggie stream notes from 8 June 2023, where Kristjan pointed to a simple ‘market filter’, as he put it.
In the video I’m focusing on today, Dr. Mansi stressed the importance of keeping things simple (5:46), in line with the rest of her approach to trading. The more complex you make anything, the harder it’ll be for you to consistently interpret it correctly. That issue aside, it’s generally very wise to simplify where possible, if only to save time and stress.
What is situational awareness?
Essentially, as a breakout trader, you’re asking yourself the following question (2:48):
“What are the odds of breakouts working right now?”
Of course, if you predominantly trade a different setup, substitute ‘breakouts’ as appropriate. The key is that you’re gauging your — or rather, your setup’s — odds of success.
Even if you trade several multiple setups, you need to know which one is most likely to work in the current market. Virtually every setup works better in certain market conditions over others. This is why it’s important to be able to determine the market environment you’re in — or as Dr. Mansi calls it, to have situational awareness (‘SA’).
To illustrate the importance of situational awareness, she showed the following slide at 4:14:
In essence, when she actually took the odds of her setup working into account (only after eight years into her trading career), her equity curve became much smoother, with much smaller drawdowns. This massively improved her bottom line, but also made trading much less stressful.
(Note that the equity curve on the left lacks certain nuances — not consistently having higher highs and higher lows, for example, nor ending up at more or less the same point as the equity curve on the right. Don’t forget that the benefits of practising good situational awareness are twofold: smaller drawdowns in weak markets and bigger gains in good markets. I’ve mentioned this to Dr. Mansi, who will be highlighting this in her future videos.)
Factors Dr. Mansi analyses
Dr. Mansi analyses three factors to gain situational awareness — in other words, to assess whether breakouts are likely to work (8:13). She’s settled on these because they are simple, make sense to her and are relevant for her trading style.
1. Watchlist
You can gain a lot of information from your watchlist:
How long is it? Typically, the longer your watchlist, the more setups you’re seeing.
What percentage is green? Assuming you are looking to buy a breakout, and that your watchlist contains potential breakout candidates, having a lot of stocks on your watchlist up for the day improves your odds of breakouts working.
Is the relative volume high? The significance of this for determining the odds of breakouts working is discussed in detail in my notes on Dr. Mansi’s “How I enter stocks” video.
2. Portfolio/recent trades
This is something a lot of traders look at, for good reason: if you want to get a sense of how well your next few trades might work, look at how your past 10–20 trades have worked:
Is your portfolio gaining traction?
How well did your recent trades work?
Are breakouts following through?
3. General market/indices
Many traders look at one or more indices to get a sense of the overall market, even if they mainly focus on their own universe of stocks. Dr. Mansi looks at the following:
Are the indices ($DIA, $IWN, $QQQ and $SPY) in an uptrend, range-bound or in a downtrend?
Is major news coming up, such as an FOMC announcement, election news and/or earnings season?
Which sectors/themes are leading or lagging?
Are any bubbles forming in any hot groups, e.g. AI?
Planning your next day
Dr. Mansi’s follow-up question to the odds of her setup working is (3:25):
“What’s my plan for tomorrow? Will I play offense or defense?”
She elaborates on this from 11:53:
(Dr. Mansi’s different rules for swing and position trades are discussed here. To understand why Dr. Mansi won’t take more than two breakouts at a time, even when playing offense, read her progressive exposure rules.)
The critical point is that you need to know how you’re coming into the day:
Are you going to be highly selective about your trades, or taking as many breakouts as your risk management rules allow?
Are you taking pilot positions, full positions, or something in between?
Are you going to take winners quickly or try to hold them for a bigger move?
The answers to these types of questions depend on how you read the market — in other words, your situational awareness. This is, without doubt, one of the harder pieces of the puzzle to master, but also an extremely important one. You have to learn when you can press your luck, especially when trading a strategy like breakouts, whose success rates are highly dependent on the market environment. To quote a recent tweet from Dr. Mansi:
“SA > Setup.
“A simple equation that is worth millions.”
Dr. Mansi also tweets, before every market day, her trading plan for the day, which accounts for her situational awareness. She goes through a few examples from 20:13.
Achieving superior performance
Although not explicit about situational awareness, I do feel that this is a good place for a Stanley Druckenmiller lesson. In the conclusion of his interview in The New Market Wizards: Conversations with America's Top Traders, Jack Schwager wrote the following:
'“According to Druckenmiller, superior performance requires two key elements: preservation of capital and home runs. The first principle has been quite well publicized, but the second is far less appreciated.
“From a portfolio perspective, Druckenmiller is saying that in order to really excel, you must take full advantage of the situations when you are well ahead and running a hot hand. Those are the times to really press, not rest on your laurels. Great track records are made by avoiding losing years and managing to score a few high-double-digit- or triple-digit-gain years.
“On an individual trade basis, going for home runs means really applying leverage in those infrequent circumstances when you have tremendous confidence. As Druckenmiller puts it, ‘It takes courage to be a pig.’”
Now, I realise that a significant proportion of my readers are still trying to become consistently profitable, and until you achieve that stage, trying to achieve superperformance may actually hinder your journey towards achieving that consistency.
Having said that, achieving exceptional returns is presumably your goal. That requires the two things mentioned by Druckenmiller: capital preservation (i.e. limiting drawdowns) and home runs. I wanted to mention these here to emphasise that, for a breakout trader to really excel, you need to practise situational awareness. Without it, you can’t figure out when to do which.
Conclusion
There are many ways of practising situational awareness, including by looking at your watchlist and recent trades, considering market breadth, looking at the indices, etc.
But as is typical for Dr. Mansi’s approach to trading, she likes to keep things as simple and logical as possible. Choose two or three indicators/factors/market filters that make sense to you and your strategy, and analyse them every night to help determine your trading plan for the next day — in particular, whether to trade cautiously or be aggressive.
To give the final word to Dr. Mansi (31:07):
“In conclusion, you want to keep things super simple. Do not get scared of this complex term called ‘situational awareness’, or try to fit in 50 different things to figure out what your trading plan for the next day is going to be.
“Keep it simple, use what makes sense to you, and what makes sense to your strategy. Most importantly, understand the logic behind it. This is not something that you can memorise [like chart patterns]; this is a skill that you need to learn. And the only way to learn this, is if you understand the logic behind it.
“If you don’t understand the logic behind it, you’re always going to look to someone else to tell you what their [assessment] is. […] That is not going to help you in the long run. […]
“Once you understand [the logic], and you create your own really simple framework for how to analyse the market and how to create your trading plan for the next day, you will not need to depend on anyone else, and your trading will improve [by] leaps and bounds.”
Of course, this applies to virtually any skill. If you understand the logic behind something, you can do it on your own. That gives you confidence and conviction, which will always improve your results.
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Awesome explanation. Completely understood the concept and each nuances about SA. Please continue the similar work. Best wishes.