Situational Awareness is a concept which has been instrumental in shaping how I conduct my market analysis. Many of you may not have heard of this concept, so I thought it would be good to provide a brief introduction today. And if there’s interest from readers we can go a little deeper into the topic in future articles.

This is a concept I’ve borrowed from my previous career in the aviation industry, where it is one of the key components taught in the field of Crew Resource Management and Aviation Safety.

Situational Awareness, as defined by ICAO (International Civil Aviation Organization) in their Industry CFIT (Controlled Flight Into Terrain) Task Force is…

  • “… an accurate perception of the factors and conditions currently affecting the safe operation of the aircraft and crew.”

 

You may be familiar with the statement that we don’t trade the markets, but rather our mental interpretation of the markets. Situational Awareness is about providing you with the knowledge and skills to ensure that not only is your mental model based as much on reality as possible, but that it also updates in real-time as the price action evolves.

To apply the concept to trading, I find it easier to bypass the official definition above and use the ‘working definition’ provided by Endsley (1988). Situational Awareness is…

  • “the perception of elements in the environment within a volume of time and space, the comprehension of their meaning, and the projection of their status in the future.”

 

This definition has three key components – perception, comprehension and projection.

  1. Perception – Being capable of accurately perceiving the information that the markets are providing.
  2. Comprehension – Understanding, or interpreting, the information available from the markets.
  3. Projection – Anticipating future trade setup opportunities based on your understanding of the market movement.

 

Perceiving market movement, understanding what that means, and knowing how that will most likely develop in the future.  In other words, just knowing what’s going on… or market analysis!

So in applying the Situational Awareness concept to the conduct of my own market analysis, I break the task into three distinct phases:

 

Perceive the Market Environment

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