Sanity check
Definition · Level 13 · Interview mechanics
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A quick test of an answer before you say it: a probability lies between 0 and 1, an expected value lies between the smallest and largest payoff, and daily volatility is smaller than annual volatility.
Example
“A 150% chance?” Impossible, so the method was wrong.
Where Tradecraft teaches it
Level 13 · Interview mechanics, in the lesson “Interview habits: answering under time pressure”: What trading interviewers are really testing, and the answer habits that work under time pressure.
Related terms
- Answer firstInterview habit: when you have the result, say the number or verdict in your first sentence, then give a one-line reason.
- “I don’t know, but…”The honest alternative to pretending: admit the gap in one sentence, then show how you would reason toward an answer.
- State your assumptionsWhen a detail is missing, say the natural reading aloud and carry on, rather than asking and waiting.
- Think out loudNarrate your method on anything that takes more than a second or two.
- √2, √3 and e≈ 1.414, ≈ 1.732 and ≈ 2.718. With independent returns, volatility over two or three periods is one-period volatility times the first or the second…
- √252≈ 15.87: the factor between daily and annual volatility on trading days (the United States has about 252 a year; European exchanges 250 to 255)…