Scenario Planning in VUCA Times

Darwin’s law of evolution crystallizes the importance of learning how to adapt to a changing environment. History teaches us that even the very best winning performance streaks and most sophisticated trading systems eventually face a cycle of market headwinds. 2022 is a case in point, after a record bout of volatility, with the S&P500 triggering its largest peak-trough drawdown since the financial crisis of 2008. This served as a bellwether warning of change in market regime, characterized by VUCA times (Volatility, Uncertainty, Complexity & Ambiguity) – periods marked by elevated volatility, coupled with heightened macro and event risk.

In challenging environments, traders are forced to re-evaluate their preconditioned market & mind strategies. Recall the prior late-market cycle fuelled linear trends, driven by record FOMO (Fear of Missing Out) sentiment, amplified by central bank liquidity. This created a bull-quiet market regime, with low volatility of less than a 5% drawdown on the S&P500 for more than a year! “Buy on the dip” became the infallible mantra, alongside passive investing, driven by a new era of speculative “rock-n-roll” investing opportunities such a tech, MEME stocks and crypto.

Fast-forward to the current market regime of bear-volatile and everything changes. Your response-ability is key to succeeding and often requires downloading a new mental map as well as modelling best practices. Scenario Planning for Trading is at the heart of this evolution, often harnessing the crisis-opportunity. It teaches you the importance of preparation vs. prediction to significantly enhance your trading approach, whether macro, fundamental and/or technical.

Another key insight is the “Map is not the territory” as cited by independent scholar, Alfred Korzybski. This school of thought, popular at VTI, is often illustrated by a group a blind men exploring the sum of all the parts of an elephant. Each one believing they have discovered their own perception of truth. Each think they have found either a snake, wall or rope, which in reality serves as the elephant’s trunk, body and tail! This is a useful metaphor for both life and markets. There are no certainties, only probabilities.

A large part of scenario planning is discussion, challenging and sharing different perspectives. A diverse group avoid inertia, biases and improves our preparedness to multiple knowns and uncertain futures. One recommended scenario-planning framework, highlighted at our recent webinar is based on a four-stage process:

1. Identify driving forces.
2. Identify critical uncertainties.
3. Develop plausible scenarios, opportunities and threats.
4. Discuss implications and paths.

It should focus on both your outlook and market strategy. This is a powerful overlay to your existing macro, fundamental or/and technical analysis. Keen to learn more? Review our educational resources (webinar) and explore our coming workshop on Scenario Planning in VUCA times.

About the Author

• Ron William, CFTe, is a market strategist and educator/mentor with more than 20 years of experience working for leading macro research and institutional firms, producing tactical research and trading strategies. He specializes in global, multi-asset, top-down framework, grounded in behavioural technical analysis, driven by cycles based on the “Roadmap” signature model of veteran market technician Robin Griffiths, published in his book “Mapping the Markets”.
• Ron also applies a “market & mind” approach at IntensiChi, using the latest techniques in behavioural-risk models and neuroscience sourced from expert groups. He further supplements with mentoring/coaching, trained by the International Coaching Federation (ICF), and teaches a regulatory approved masterclass in Applied Behavioural Science, with investment, private banks and CFA Societies.
• Ron’s primary work, as part of his current institutional market advisory firm (RWA), acquired global industry recognition as winner of “Best FX Research” in 2020. Financial media programs and industry publications regularly feature his market insights, including “Is the big cycle about to turn?”, predicting the 2020 crash and alerting the “Minsky paradigm” of 2020 H2-2022.
• Driven by high-integrity education, Ron serves as part of the education committee of the International Federation of Technical Analysts (IFTA), Development Director at the Foundation of the Study of Cycles (FSC), Head of SAMT’s Geneva Chapter, and an honorary member of ESTA. He is also a visiting lecturer at universities, active guest speaker for the CFA, CAIA and CISI, and senior teacher at colleges offering an accredited diploma in trading and investing.