Six Sigma Principle

Written by JS T. Alexander | 21 August 2009

On Six Sigma Principle & Practice 

The Six Sigma Principle ( SSP ) is a ' thought-driven process method ' designed to focus on ' define, measure, analyze, improve, implement and control ' business management decisions or in this case trading decisions & its' relative performance by recognizing specific areas of a strategic trading plan methodology.

And in addition; to know what areas of responsibility would need to be improved and verified that could only be seen through the trading results in every step. With less than ' six deviations ' of the process; the smaller the sigma level the better the results would be as it has a higher rate of affirmative trades. In short the overall trading perspective should define and measure the ratio of risk tolerance points and the proportionate reward relative to the time table of exposure for the allocated and leveraged amount of investment funds that was used in the market. 

The overall objective can be achieved through several transactions or trades and not only by a single trade over a certain period of time. However at any point of engaging in the market, the goal and objective has to be achieved. Then it is prudent and necessary to pause from trading and a wait and see attitude should be exercised until the next pre-dominant opportunity would come along and presents itself in the market analysis.

This principles co-relates with the writings by the once infamous Chinese general in the 6th century BC in the name of Sun Tzu. The compiled writings in “The Art of War” were made some 2500 years ago and have guided some military tacticians, politicians, philosophers over the past 25 centuries in the ' thought-driven process of strategic planning and approach '. As some of our practising investors / traders have managed to connect these  ' Principles and Disipline '  into trading techniques in the stocks, commodity and financial markets over the past three (3) decades.

It is to no surprise that the Six Sigma Principle developed and practised by Motorola have been used time and again by some famous business leaders such names as Jack Welsh of General Electric and Toyota for that matter. Today, well renowned universities and colleges provide course training and certifications on this subject matter. Applying these proven principles in practice can only mean better disipline in trading and the relative rewards that comes with it. And only then that business and financial objectives can be met with managable risk under control.

Basic Disipline & Practise are as follows:

By practising the basic ' Principles of Six Sigma ' - the following thought process should be well exercised and practiced to obtain the a higher degree and level of Skill necessary in building a ' Net Positive ' bottom line results that could be achieve over a specific period of time.The key elements of disipline are as follows :

Define market conditions in all possible angles.

Fundamental Factors affecting prices such as: Economic News, Trade Policies & Treaty, Political conditions & Government regulations, Central Banks or the G10 Nations, Financial News and overall market sentiments of investors. After careful considerations, Identifying the Major Trend and the subsequent near term trend will determine the trade position. Needless to say that this method is most effective in both the Foreign Exchange and the commodities market as it follows certain market cycles and patterns identifiable to the market conditions.  

Measure Risk Proportions / Reward Ratio.

Depending on each individual investors ' Risk Tolerance ' levels would be the primary criteria as to how much percentage shall be properly allocated for any single or multiple trades on a given market condition pertaining to margin requirements, amount of net exposure and coverage, a defined time-frame and a pre calulated objective of probable loss at ' worst case scenario ' and on execution of settlement of trades based on the projected gains whenever prices have made its initial resistance and support prices. These are all relatively base on certain market conditions stated above and whatever the prevailing market sentiments index would reflect. The most basic and acceptable proportion would be a 3 to 1 ratio on probable profit objectives against a loss of one. In essence, whenever a there would be more winning trade versus the losses occured; having a net positive bottomline is the best result.

Analyze technical factors.

Technical Factors that include the most widely used trading systems that are basically acceptable to investors and traders alike that includes the trading platforms offered in the industry that meets its standard for trading excellence. However, as these technical tools are exactly the same as they come with the the trading platform package and which one of these tools are best to use depends on the level of skill a trader / investor  have. A note of caution : The technicals are only has good to be use as reference guide and should not be treated as major indicators simply for the fact that if they were as accurate as others claim, then every trade would have won in the market by now. There are no holy grails on these matter.  

Improve / Innovate / Implement strategy

Once the  strategic plan has been made, taking a second or third look would not hurt. To be able to improve any such plans has to be looked upon from the outside looking in. Thinking outside of the box can only differenciate a well develpped plan from a bias market sentiment. A strategy developed from an independent perspective without the influence of the other market news and reports will only be justified upon completion or settlement of the trade. Timing the market based on exact points on entry or exit may be quite impossible to achieve. As it is not a matter of price calls, but a matter of identifying the trend within an important event.
 
 

Control / Verify / Manage.

Controlling the market is not at all possible! However, controlling when to and not to place any particular order is under control by the investor / trader at all times. Whenever the above three (3) methods of trading principles is insync; then upon verification of market conditions one can manage their trades more significantly and shall be confined within the set limits of the strategic plan.  

This process may take some form of discipline and training the mindset of the trader / investor to become a strategist rather than a trader, while trading this market. Experience may be able to play a significant role in trading specially if the day to day trades are being logged and analyze. This form of training would lead to an applied procedure where correct points of execution and mistakes made will be noted and remembered.

Some people are meant to trade others are not! If managers act accordingly rather than simply telling employees what to do; efficiency and productivity would increase. This goes without saying the same for trading.

With efficiency from quality and reliable content of resource information in making the final strategy; the result can only be outstanding. This is very true in the sense that with the same shared information in the market, receiving the reports in real time breaking news would be absorb by the market participants as quickly as it is traded. However, it is in the final outcome whether the trades made were effective, as it was before or after the news has been delivered. These are just some finer points of reference to consider in having a strategy in place at all times whether the market moves in favor or not.