“If you don’t ask the right questions, you don’t get the right answers. A question asked in the right way often points to its own answer. Asking questions is the ABC of diagnosis. Only the inquiring mind solves problems.” – Edward Hodnett, a famous British poet
This is very true. Asking the right questions is an important part of getting correct and long-lasting solutions. The 5 “Why” Analysis is an effective method that aids the decision-making process. It leads to pin-point answers which are very logical. The solutions are based on facts and not on gut feelings. So how can it help in solving problems pertaining to trading? It can be very helpful here as well but you need to understand it fully before applying the concept.
Understanding 5 “Why“ Analysis
This process was invented by Sakichi Toyoda, the founder of Toyota Industries. This company still uses this approach to solve their routine problems. Based on an in-depth understanding of a problem, it helps in the decision-making process. Stubborn or recurrent problems often refuse to go away easily. These problems need more than a simple “quick-fix” solution. By fixing the root cause, you make sure the problem doesn’t recur. In this method, you resolve the symptoms and work on the root cause directly.
The method is not very difficult to apply: When a problem occurs, repeat this “Why” five times to reach out to the root of the issue. The solution will then become crystal clear. This can be applied to improve one’s performance in trading and various other aspects such as selecting the right trading technology or reducing slippage with the help of technology. This is how you can proceed.
Define Problem
Delineating a problem is the first key step toward resolving it. Identify the problem in the form of a clear problem statement; for example, “Why is your forex trading strategy not working?” or “Why has slippage in trading increased significantly?”
Once the problem is identified clearly, write this problem statement on a whiteboard or a sticky note. Don’t forget to leave some space for subsequent answers. Let’s start with the first example to grasp the concept.
Example # 1
Problem Statement: “Why has slippage in trading increased significantly?”
Now ask the first “Why“
Ask yourself why this problem of slippage in trading is occurring. This may sound simple but you need to give it a serious thought. Search for genuine answers to this question and avoid guesswork. This eliminates the problems often attributed to deductive reasoning that leads to a large number of possible causes and in the process creates more confusion.
Ask the second “Why“
After a thorough analysis, you find out that latency and delay in order execution are the main reasons behind the slippage in the trading account. It is time to again ask “why” and move on to the third stage.
Ask the third “Why“
In essence, you need to ask: why does latency and delay cause slippage? Latency is caused due to Internet connectivity-related issues. The farther the distance from the exchange server, the more the latency will be.
There may also be some other reasons for high latency such as selection of broker type. For example, A-Book brokers often have higher latency than B-Book brokers.
Ask the fourth “Why“
A fourth possible “WHY” question could be: why am I having latency issues? The reason behind latency in your case could be the distance between your broker’s server and the market exchange.
Or
You opted for an A-Book broker whose system has high latency.
Here you need to pause for a moment and ask yourself whether the cause you just wrote is real or it is merely a symptom of some other underlying problem. Repeat this step until you reach the final underlying cause of the issue.
Ask the fifth “Why“
A possible 5th WHY question could be: why did I end up choosing a high latency broker? There are only a limited number of forex brokers that offer low-latency systems and their charges are just too steep. So you may have unconsciously opted to choose a broker with low charges, without knowing that this choice also came with higher latency which is now affecting you slippage-wise.
Countermeasures You Can Take
You need to find out a reliable forex broker that provides low latency trading services. You can choose a broker that uses VPS-based colocated servers with an exchange specifically designed to minimize latency and improve trading results. Your orders will be executed at lightning speed. You can see whether they have internationally renowned partners such as Equinix, Global Switch, or Internap to provide the requisite technical infrastructure and connectivity.
Summing Up
The 5 “Why” approach enables you get to the core of the problem you are facing in trading and find long-term solutions. Any wonder that a stupendous number of traders regard 5 “Why” as the key to any issue?
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