Pre-mortem: imagining the failure before the strategy goes live

[Shadow Trader]

A pre-mortem, a technique from decision research, asks a team to imagine that the project has already failed, then write down why. The exercise surfaces risks that optimism hides.

For a new scalping strategy, the version is simple. Before going live, write: "It's three months from now and the strategy lost 15%. What happened?" Then list the most plausible causes. Typical entries include: spreads were wider than assumed, the edge was overfitted, a news event produced a gap through stops, the broker changed execution, size was too large for the actual volatility, or rules were bent after a few wins.

Each cause suggests a countermeasure. Wider spreads: add a spread filter and test with a pessimistic cost model. Overfitting: forward test before scaling. Gaps: stop trading around events. Broker changes: monitor slippage monthly. Oversizing: start at a fraction of target size.

The list becomes part of the trading plan. It also makes later problems easier to diagnose, since the likely suspects were already named.

Teams sometimes extend the exercise with a second question: "What would show up early if this were going wrong?" The answer yields leading indicators to monitor, such as widening average slippage, a falling win rate in a particular session, or rising trade frequency without more signals.

Writing down thresholds in advance, like "if slippage averages above 0.5 pips for a week, pause", gives the early warnings teeth.

What would the pre-mortem for the current strategy say, and which cause seems most probable?