Audio available at the end of this post.
In aviation, situational awareness is defined as:
“The perception of the elements in the environment within a volume of time and space, the comprehension of their meaning and the projection of their status in the near future.”
That definition could just as easily apply to situational awareness in trading. No wonder traders adopted this term!
If we take the above as a starting point, situational awareness in trading becomes about three things:
What action you can observe within a given market period (current or historical).
What you understand that action to mean or signify.
The implications for the next session(s).
This list reflects what trading boils down to. Especially shorter-term swing trading.
As Stockbee says: your first problem is to find a setup. Your second problem is to understand when that setup does and doesn’t work.
In other words, you need situational awareness.
That allows you to stay on the right side of the markets. You’ll know:
What tactics to deploy at what time; and
When to get aggressive or defensive.
Stockbee’s Market Monitor
One of Pradeep’s most important tools for gauging market environment is his breadth-based tool: his Market Monitor, available for free on his website. Pradeep updates it daily, and the Market Monitor contains data going back to 2007.
But for a tool to be useful, you need to learn how to use it.
That starts with understanding what the Market Monitor is actually capturing: underlying buying or selling pressure. That tells you whether to get aggressive and, if yes, whether on the long or the short side.
Pradeep walks us through various examples in this video:
To me, one of the most important take-aways is how you need to go back through previous years’ data, and study it. That’s not unlike studying historical charts — you need to develop your eye so you know what you’re looking for in real time.
Pradeep updates the Market Monitor by hand, using the data from this TC2000 layout.
You can learn more about the Stockbee Market Monitor in this video:
I think the benefits of studying videos like these are twofold:
You learn how to use existing tools, such as the Stockbee Market Monitor.
You understand the thinking that went into Pradeep’s selection of data points to track, which helps you build your own market monitor tool(s).
Stockbee’s daily study
Another major tool in Pradeep’s situational awareness is his daily study of stocks that made ≥20% moves within a week, and ≥100% moves within a year.
As he wrote (I copy-edited):
“Everything you need to make money, you’ll learn from that [daily study].
“You need to understand the nature of stock moves:
How they start
How they progress
How they reverse
“By doing this daily, you’ll have a working model of what works in the current market. Then, you can start designing the scans to find them.
“This study will help you develop your own understanding of market moves.
“Once you have sufficient experience doing this, you can start discounting a lot of conventional wisdom or market speak. Because you can see what the ‘guru’ is telling you on Twitter or in a book isn’t in line with what’s actually happening in the market.”
More recently, in a tweet, Pradeep referred to this type of study as a ‘mini deep dive’:
The scans Pradeep runs in TC2000 for his daily studies are:
Bullish ≥20% moves within a week:
c/c5>=1.2 and minv3.1>100000 and c>=5
Bearish ≥20% moves within a week:
c/c5<.8 and minv3.1>100000 and c>=5
Bullish ≥$20 moves within a week:
c-c5>=20 and minv3.1>=100000
Bearish ≥$20 moves within a week:
c5-c>=20 and minv3.1>=100000
I’ve previously written a stack about the ‘what’, ‘why’ and ‘how’ of deep dives. It includes explanations of the components of scans like the above.
Build a situational awareness framework
In yet another video, Pradeep goes over a series of questions to ‘arrive’ at his situational awareness every day:
Here’s my take on his questions (I’ve modified them for clarity, and added headings):
1. Overall plan today
What’s your bias coming into today’s market?
What’s your plan to exploit it?
What’s your backup plan?
2. Preparation for today
What homework/preparation have you done for today’s session?
What 2–3 opportunities have you identified for today?
What’s your plan for each open position?
For ideas on how you might prepare your daily plan as a part-time trader, check out Clement Ang’s guest post.
3. Recent market action
What’s currently working in the market?
Anticipation?
News plays?
Breakouts?
Bounces?
Shorts?
Other?
What stocks (and themes) are leading the market?
4. Tools
Are your tools (software, hardware, etc.) set up and ready to go for today?
5. Mental state
Are you calm, excited, harried, etc.?
What’s driving your emotional/mental state?
What can you do to get into a calm and controlled state?
I’ve written various stacks on actionable psychology. Dave (@DMacTrades on 𝕏) has also guest posted about how to journal your mental state, so you can track and improve it.
6. Self-improvement today
How will you improve your trading skills today?
How will you enhance your psychological control today?
How will you increase your knowledge of the markets today?
I talked about how to solve trading problems and constantly improve in this stack.
7. Looking ahead
What needs to happen for me to be a confident trader who’s in control?
Do I have the necessary resources to get there?
Do I have the burning drive to get there?
By the way, these questions align well to the questions Tom Dante recommends for your weekly performance reviews (outlined in this tweet).
The other thing that strikes me about this list is how many of these points link to general preparation and planning. And, I think, rightly so.
Closing thoughts
Situational awareness isn’t some abstract, isolated concept. It’s something to embed into your overall trading.
In fact, to an extent, it’s tied to your overall life.
Trading is more a lifestyle than a job — and not just in terms of the odd hours some of us work (depending on time zone).
What you do outside of trading significantly affects your trading performance, whether we’re talking:
How you look after yourself physically (diet, exercise, rest, etc.);
Your state of mind — for example, if you’re worried about something in your personal life, your trading performance may suffer; and
The state of your tools and equipment. Something as banal as a shaky internet connection can hugely matter in trading!
To come back to how I opened this stack, with the definition of ‘situational awareness’ in aviation:
“The perception of the elements in the environment within a volume of time and space, the comprehension of their meaning and the projection of their status in the near future.”
‘Environment’ may now have additional meaning. It’s not just the market conditions — it’s your overall physical and mental state, including your health and the extent to which you’ve prepared coming into the next trading session.
They’re all part of situational awareness.
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Listen to this stack
In case you were wondering, the outro is the finale of Chopin waltz #4 (Op. 34, No. 3).
I’ve posted a video of me playing the full song on 𝕏. It’s not perfect — I’m only an amateur pianist — but I hope you enjoy anyway!
Next week
I’m taking a few days off to spend time with family, so won’t write a new stack next week.
Instead, I’ll record myself reading out one or two of my more popular older stacks (that don’t yet have audio versions), and share them next Saturday.
If you have requests, let me know :)
More content like this
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Stockbee's environment compared to all the crap on the web is rare and allows you to interact with incredible traders, for instance Qullamaggie. Many years ago, I read the Stocktwits book that helped me discover Stockbee and joined his room for a long time. I use what I was taught,...and continue to refresh with him, you can never stop learning, however there comes a time when you relie on your process. You have a great subject here, great focus on the best traders of our day.
Very helpful post for those just starting to take on deep dives and trying to develop situational awareness. Keep the coming!