The trades that hurt me most were never the ones I was unsure about. They were the ones I was sure about, sized up because I was sure, and then watched go wrong in a way I could have named beforehand if anyone had asked me to. Nobody asks you to. That is the whole problem. When you are excited about a position, your brain is busy building the case for it, and the failure modes stay politely out of sight until they are your P&L.
A pre-mortem is a small trick from decision science that forces them back into view. The setup is simple. Before you enter, you assume the trade has already failed. Not might fail, has failed, past tense, done. Then you ask why. The framing matters more than it sounds like it should. Asking "what could go wrong" gets you a shrug and two vague answers. Asking "it went to zero, walk me through how" gets you a list, because now you are explaining a fact instead of forecasting a risk, and people are much better at explaining than forecasting.
Why the tense change does the work
When you predict, you hedge. You say something could maybe possibly happen and you move on feeling responsible. When you explain a failure that has supposedly already occurred, you reach for concrete mechanisms, because a real event has real causes. This is the same reason a good post-mortem after a blown trade is so much sharper than any risk assessment you wrote before it. The pre-mortem just borrows that sharpness and moves it to the front, where it can still change what you do.
I run it out loud or on paper, never in my head. In my head everything sounds reasonable and I skip the uncomfortable ones. On paper the thin reasoning is obvious. You want the ugly causes written down where you cannot pretend you did not think of them.
The ten-minute template
I attach this to any position meaningfully above my normal size. Below normal size I skip it, because the point is not ritual, it is catching the trades where being wrong actually costs something. Set a timer for ten minutes and work through five steps.
- State the trade in one line. Direction, instrument, size, and the single reason you are doing it. If you cannot compress the thesis to one sentence, you do not have a thesis, you have a mood.
- Declare it dead. Write "this position is closed at a full loss." Sit with that for a second. You are not brainstorming risks, you are explaining a corpse.
- List every plausible cause. Aim for six to ten. Force yourself past the first three obvious ones, because the obvious ones are already priced into your fear and the useful ones usually show up around number five.
- Split each cause into monitor or haircut. Some causes are things you could see coming if you were watching. Those become monitoring triggers. Some are things you cannot see coming at all. Those become a size reduction, because the only defense against an invisible risk is owning less of it.
- Re-price the position. Given the haircuts, restate your size. Given the monitors, write down the exact levels or events that would make you cut. Now you can enter.
Turning causes into triggers and haircuts
This is the step everyone skips, and it is the only step that changes behavior. A list of fears you do nothing with is just anxiety with better formatting. Each cause has to become an action.
Say you are long a mid-cap crypto name because a large wallet has been accumulating and you want to ride the flow. Your pre-mortem list might include: the wallet was distributing into you, not accumulating, and the on-chain read was late. That one is a monitor. You set an alert on that address and on aggregate exchange inflows, and you decide in advance that a reversal in the wallet's behavior is your exit, not a reason to average down. Another cause: the whole sector rolls over and your name goes with it regardless of the wallet. That one is partly a monitor, you can watch the sector benchmark, and partly a haircut, because correlation risk is exactly the kind of thing that shows up faster than you can react to it. Another cause: an exchange delisting or a liquidity air pocket. You cannot monitor your way around that. It becomes a straight size cut and maybe a decision to scale in rather than enter all at once.
The haircut side is where the sizing discipline lives. My rough rule is that every cause I genuinely cannot monitor takes a bite out of the size, and the bites compound. Three unmonitorable risks and a position I was going to enter at full conviction quietly becomes a two-thirds position. That feels like leaving money on the table right up until one of those three things happens, at which point the smaller size is the only reason the account is fine.
The failure modes of the pre-mortem itself
The technique has its own ways of going wrong, and I have hit all of them. The first is treating it as a formality. You dutifully list four risks, feel virtuous, and enter at the same size you always planned. If your pre-mortem never once changes your size or your plan, you are not doing it, you are performing it. The tell is that you already knew your entry size before you started.
The second is only listing risks you were already worried about, which is just your existing anxiety wearing a lab coat. The value is in the causes you did not want to write down, so specifically go looking for the one that would embarrass you. The third is running it and then ignoring your own triggers in the moment, because the position is green and the alert feels premature. The whole reason you wrote the levels down beforehand was to bind the calmer version of you to the decision. Honor that person.
One more thing that helps: do the pre-mortem before you set the size, not after. If you have already decided you are putting on a full position and then run the exercise, you will unconsciously shape the list to justify the size you wanted. Let the causes set the size, not the other way around.
None of this is complicated, and that is sort of the point. Watching wallet behavior, sector benchmarks, and exchange flows in one place is the kind of monitoring a tool like Blockcircle handles so your triggers actually fire instead of living in a notebook you never reopen. But the hard part was never the wiring. It is spending the ten uncomfortable minutes, before you are committed, imagining in detail the version of the trade where you were wrong, and then letting that version quietly shrink your size.