Five whys of trading

Use the 5 Whys to become a better trader

5 min read

A while ago, I read an excellent book called The Lean Startup by Eric Ries. The Lean Startup describes a new approach for startups, using concepts like building a minimum viable product (or MVP) as soon as possible, innovation accounting, pivots and more. It’s based on lean manufacturing, a production process pioneered by companies such as Toyota and Ford. A highly interesting read if you are interested in starting your own business.


The book also details the use of 5 Whys, a technique to explore cause and effect relationships when particular problems are faced. Its primary goal is to find the root cause of an issue, by repeating the question “Why?” five times. Each answer forms the basis for the next question. It takes about 5 iterations on average to get to the root cause of the problem.


Here’s an (fictitious) example. Suppose a machine stopped functioning:

  1. Why did the machine stop? There was an overload and the fuse blew.
  2. Why was there an overload? The bearing was not sufficiently lubricated.
  3. Why was it not lubricated sufficiently? The lubrication pump was not pumping sufficiently.
  4. Why was it not pumping sufficiently? The shaft of the pump was worn and rattling.
  5. Why was the shaft worn out? There was no strainer attached and metal scrap got in.


The root cause was that there was no strainer attached. If you didn’t ask the 5 whys, you might not ever fix that problem, but instead just try to patch up the resulting issues it caused. The idea is that you make proportional investments to fix each of the 5 whys. This way, the total investment in time fixing the issue won’t be too big but you should still see valuable improvements afterwards.



5 Whys of trading

5 whys of trading


Which leads me to the 5 whys of trading. As traders, we are facing problems on a daily basis. Some might be obvious (“why have I lost this trade?“), but others might be much more subtle (“why can’t I seem to think clearly when I have a trade on?“).


It’s perfectly normal to work on problems as a trader. I don’t believe any trader can ever look in the mirror and say he/she knows everything there is to know about trading. Traders are inherently a work in progress. Lifelong learners. The market is ever-changing, so we have to be adaptable. The only question is if you’ve worked through enough problems to be consistently profitable or not.



Knowing what to do and actually doing it


In the long run, our ability to solve problems effectively will play a large role in our future success as a trader. So why are we so bad at it? Or rather: why do we often know we have a certain problem (let’s say “allowing losses to get too big”), but can’t seem to actually fix it?


There are a couple of reasons for this. The drive to change is one of them. You might know you should start living a healthier life, but doing so is something completely different. Other things get in the way and your dedication to eating healthy food and exercise might become less. Certain habits are also ingrained in our daily life and without a conscious effort to change those habits, things will likely stay the same. The good news is that it’s actually not too difficult to change your habits; The Power Of Habit by Charles Duhigg is an excellent read on how to do this.


The second reason is arguably more serious and deciding for our long-term success. We often don’t figure out the root cause of the issue. It’s not sufficient to say “I need to cut losers short” (as the trader’s mantra goes), you need to delve deeper. Often, there is an underlying cause that is the reason you exhibit certain problems in the markets. Simply trying to fix the symptom will not be helpful and it’s very likely you will fall back to old habits very quickly. This is where the 5 whys of trading becomes useful.


Five whys of trading


The root cause of your trading issue


Let’s try this instead. Suppose you let your losses get too big:

  1. Why do you let your losses get too big? Because I often move my stop loss if I see the trade going against me.
  2. Why do you move your stop loss? Because I’m convinced price will turn in my favour again.
  3. Why do you have this conviction? Because I feel I want to be proven right all the time.
  4. Why do you want to be right all the time? Because I’m uncertain about my trading strategy and being right helps me feel good.
  5. Why are you uncertain about your strategy? Because I’ve not actually tested it well enough after I changed it recently.


By using the 5 whys, we actually uncover multiple underlying issues that are much more serious and fundamental than just having a loss that is too big. What seemed like a problem is actually a symptom of the underlying cause. Different issues will have a different root cause, but it’s important to be as specific as possible in your analysis. By doing so, you will find it easier to start defining actionable solutions for each of the 5 whys.



After you figured out the root cause (not testing your strategy after a change was implemented), that’s where you should focus your energy on. Depending on the issue, it might also be valid to make proportional investments to each of the other whys. To give you an example: if you’re afraid to lose, consider trading a smaller position size in the future until you have the underlying issues solved.





The 5 whys method can be very helpful in uncovering the root causes of problems a trader faces. Rather than trying to patch up the symptom, traders should delve deeper and try to figure out the most pressing underlying issues. Only by tackling those issues, traders will build the solid foundation needed for long-term success in the markets. When using the 5 whys method, it’s important to be very specific and as honest as possible with yourself. Doing so will enable you to come up with actionable ways to fix the problem effectively and become a better trader.



Have you tried this technique to fix pressing issues with your trading? Let us know how you did it in the comments!


FX and futures trader, using price action, market profile and order flow to trade markets. I also have an interest in trading psychology and algorithmic trading. Follow me on Twitter: @GhostwireTrader