A New Trader's Journey to Success

[lesm]

An article from digg.com.

http://digg.com/business_finance/A_...rney_to_Success

Here is the article:

A New Traders Journey to Success

In this thread I am going to take you through the different development stages of a new trader. Most of this comes from my own experience. Like any other profession, trading takes years of practice to reach the ultimate level. While doctors and lawyers have gone through higher education to obtain their license to practice, traders are required to obtain knowledge on their own. If you are in it for the quick buck, think again. The challenge is tough but the achievements are rewarding.

Stage One: The Clueless Trader

This is the first stage when you enter trading. You may have picked up a book on technical analysis somewhere, heard of a day trader making millions, or got lucky in an earlier stock investment. After all, how hard can it be? The money sounds appealing and the freedom to be independent sounds attractive.

I don't mean to shatter anybody's dream but those who succeed in trading are the minority! Approximately 90-95% traders lose money. This is the cold hard facts. In the first stage, every trader is optimistic. You open a direct access brokerage account and the sound of Level II, ask/bid, and market makers make trading sound like hi-tech video game. In reality you have no clue. You will buy just to see the market reverse and you will short just as the market starts to rally. Most of your trades are done emotionally. You buy just because the markets feel strong without any logical reason. You are in the unconscious incompetence stage. You have no clue how the mechanics and psychology of trading works. What's worse? You are not aware that you don't know. Most traders will blow their entire account at this stage.

Stage Two: The Rookie Trader

In this stage you have lost enough money to realize what you are doing is completely wrong. In other words, you start to realize that you don't know. You will then devour every trading book available. You will study and purchase Technical Analysis of Stock Trends by Edwards and Magee believing price patterns are the Holy Grail. You will memorize every technical pattern known to man. You will read about the ADX, moving averages, Fibonacci lines, pivot points, MACD, Bollinger Bands, channels, etc... You will go through the "help" tab on your data vendor to read about every single technical indicator available. You will plot them on your charts and spend hours looking for an indicator that works. You will be extra confident now because think you have found the magical technical indicator.

Yet, you still continue to lose money everyday. You realize that your indicators are lagging and that every other new trader is probably looking at the same thing. You realize that you are the sucker.

Stage Three: The Developing Trader

You start to realize the amount of work required and the immense learning curve that you must overcome to understand the markets. At this point, traders may find it overwhelming and quit. Stronger minded traders will push their motivation harder to start their second spurt for knowledge. Hunger and passion is needed to clear this stage. You will look for reference online, join mentor programs, chat rooms, and seminars. You realize the necessary elements needed to develop as a trader. You will ask a thousand questions and bug every professional trader you meet. You will read a thousand day trading articles. You will start paper trading, develop strategies and setups, and define risk parameters for every trade. You will go on a hunt for self-understanding to master your psychological game. You will visualize every possibility on a trade before you take it. This is the true learning phase. You are trying hard to develop your edge in trading.

Stage Four: The Determined Trader

This is the stage in which you learn to specialize in certain markets and trading methods. Without realizing it, you have finally found your style of trading after hours of hard work and research. You stick to your method and you improve it. You realize that you need an edge whether its tape reading or being a Fibonacci expert. The important thing is you are slowly transforming yourself into a specialized trader. You test your methods and they seem to work. You gain tremendous market knowledge. You reflect back on yourself and you can't help but laugh at your foolishness. Although you have not made enough money to call yourself successful you are proud of your journey and accomplishments. You realize that the Holy Grail is not about technical indicators or price patterns. You calculate risk before profits and place strict money management on all your trades. You cut losses short and learn to scale out on your winners. You start accept losing as a natural part of the game. You take high probability trades that you have tested and feel confident about your setups because you understand that trading is a game of probabilities. Your psychological makeup has changed from an amateur mindset to a professional one.

Step Five: The Consistent Trader

You rely on your trading method and start taking trades systematically. You try to aim for consistency and are meeting your daily goals often. You have reached the conscious competence stage. You are fully aware of your strengths and weaknesses as a trader. At times you feel euphoric and at times you feel pain. But you are able to understand your own psychological makeup to control your emotional swings. You are now able to trade for a living.

Step Six: The Expert Trader

In this final stage, you completely understand the markets you are trading. Being involved in it everyday you are aware of every key price level. You understand market concept and are able to predict the direction of the markets a fairly good amount of time. You pat yourself on your back and take profits as soon as you feel euphoric. You do this because you understand euphoria is the same as emotional trading. You talk to other traders and realize the development stage they are in. People start asking you for trading advice, you publish a book, and you have a specific trading methodology that represents you!

Taking trades come naturally and you are able to get in and out at the precise price levels based on tape. Instead of having the markets take your stop out, you exit when you know you are wrong. You keep your head high but remain humble on the inside. You have now officially graduated the school of the hard knocks.

Entering the trading profession can be a tough journey for many people. Trading is one of the toughest careers that you can choose. If you enjoy the challenge, you will definitely enjoy the feeling of accomplishment. Trading is 30% mechanical and 170% psychological. 200% is required to become a successful trader. Good luck and best of trading.
__________________
James Lee
Trader & Founder of Traders Laboratory
www.TradersLaboratory.com

 

[doctorj]

Re: A New Traders Journey to Success

An excellent read, thanks!

 

[Sean K]

Re: A New Traders Journey to Success

I think I'm still between 3 and 4.... Long way to go.

 

[Magdoran]

Re: A New Traders Journey to Success

An article from digg.com.

http://digg.com/business_finance/A_...rney_to_Success

Here is the article:

A New Traders Journey to Success

In this thread I am going to take you through the different development stages of a new trader. Most of this comes from my own experience. Like any other profession, trading takes years of practice to reach the ultimate level. While doctors and lawyers have gone through higher education to obtain their license to practice, traders are required to obtain knowledge on their own. If you are in it for the quick buck, think again. The challenge is tough but the achievements are rewarding.

Stage One: The Clueless Trader

This is the first stage when you enter trading. You may have picked up a book on technical analysis somewhere, heard of a day trader making millions, or got lucky in an earlier stock investment. After all, how hard can it be? The money sounds appealing and the freedom to be independent sounds attractive.

I don't mean to shatter anybody's dream but those who succeed in trading are the minority! Approximately 90-95% traders lose money. This is the cold hard facts. In the first stage, every trader is optimistic. You open a direct access brokerage account and the sound of Level II, ask/bid, and market makers make trading sound like hi-tech video game. In reality you have no clue. You will buy just to see the market reverse and you will short just as the market starts to rally. Most of your trades are done emotionally. You buy just because the markets feel strong without any logical reason. You are in the unconscious incompetence stage. You have no clue how the mechanics and psychology of trading works. What's worse? You are not aware that you don't know. Most traders will blow their entire account at this stage.

Stage Two: The Rookie Trader

In this stage you have lost enough money to realize what you are doing is completely wrong. In other words, you start to realize that you don't know. You will then devour every trading book available. You will study and purchase Technical Analysis of Stock Trends by Edwards and Magee believing price patterns are the Holy Grail. You will memorize every technical pattern known to man. You will read about the ADX, moving averages, Fibonacci lines, pivot points, MACD, Bollinger Bands, channels, etc... You will go through the "help" tab on your data vendor to read about every single technical indicator available. You will plot them on your charts and spend hours looking for an indicator that works. You will be extra confident now because think you have found the magical technical indicator.

Yet, you still continue to lose money everyday. You realize that your indicators are lagging and that every other new trader is probably looking at the same thing. You realize that you are the sucker.

Stage Three: The Developing Trader

You start to realize the amount of work required and the immense learning curve that you must overcome to understand the markets. At this point, traders may find it overwhelming and quit. Stronger minded traders will push their motivation harder to start their second spurt for knowledge. Hunger and passion is needed to clear this stage. You will look for reference online, join mentor programs, chat rooms, and seminars. You realize the necessary elements needed to develop as a trader. You will ask a thousand questions and bug every professional trader you meet. You will read a thousand day trading articles. You will start paper trading, develop strategies and setups, and define risk parameters for every trade. You will go on a hunt for self-understanding to master your psychological game. You will visualize every possibility on a trade before you take it. This is the true learning phase. You are trying hard to develop your edge in trading.

Stage Four: The Determined Trader

This is the stage in which you learn to specialize in certain markets and trading methods. Without realizing it, you have finally found your style of trading after hours of hard work and research. You stick to your method and you improve it. You realize that you need an edge whether its tape reading or being a Fibonacci expert. The important thing is you are slowly transforming yourself into a specialized trader. You test your methods and they seem to work. You gain tremendous market knowledge. You reflect back on yourself and you can't help but laugh at your foolishness. Although you have not made enough money to call yourself successful you are proud of your journey and accomplishments. You realize that the Holy Grail is not about technical indicators or price patterns. You calculate risk before profits and place strict money management on all your trades. You cut losses short and learn to scale out on your winners. You start accept losing as a natural part of the game. You take high probability trades that you have tested and feel confident about your setups because you understand that trading is a game of probabilities. Your psychological makeup has changed from an amateur mindset to a professional one.

Step Five: The Consistent Trader

You rely on your trading method and start taking trades systematically. You try to aim for consistency and are meeting your daily goals often. You have reached the conscious competence stage. You are fully aware of your strengths and weaknesses as a trader. At times you feel euphoric and at times you feel pain. But you are able to understand your own psychological makeup to control your emotional swings. You are now able to trade for a living.

Step Six: The Expert Trader

In this final stage, you completely understand the markets you are trading. Being involved in it everyday you are aware of every key price level. You understand market concept and are able to predict the direction of the markets a fairly good amount of time. You pat yourself on your back and take profits as soon as you feel euphoric. You do this because you understand euphoria is the same as emotional trading. You talk to other traders and realize the development stage they are in. People start asking you for trading advice, you publish a book, and you have a specific trading methodology that represents you!

Taking trades come naturally and you are able to get in and out at the precise price levels based on tape. Instead of having the markets take your stop out, you exit when you know you are wrong. You keep your head high but remain humble on the inside. You have now officially graduated the school of the hard knocks.

Entering the trading profession can be a tough journey for many people. Trading is one of the toughest careers that you can choose. If you enjoy the challenge, you will definitely enjoy the feeling of accomplishment. Trading is 30% mechanical and 170% psychological. 200% is required to become a successful trader. Good luck and best of trading.
__________________
James Lee
Trader & Founder of Traders Laboratory
www.TradersLaboratory.com

Interesting perspective Les,


One point screams out at the end, and that is the emphasis on psychology.

Totally agree with this. The conclusion that I have come to is that out of all the different aspects of trading, without the right psychology it is almost impossible to succeed.


Regards


Magdoran

 

[swingstar]

Re: A New Traders Journey to Success

I would say I'm just beginning stage 4.

 

[nizar]

Re: A New Traders Journey to Success

Thanks for the article lesm, a good read...

Im probably still at stage 1..!

Does any1 believe the statement below (quoted from the article) is valid?
Is anybody even pro enough to trade this way and is it even worth it for that extra few % ?

Instead of having the markets take your stop out, you exit when you know you are wrong.

 

[happytrader]

Re: A New Traders Journey to Success

Hi Nizar

Quote:
Originally Posted by lesm
Instead of having the markets take your stop out, you exit when you know you are wrong.

This is a defining characteristic. Traders hate being dominated so they don't hang around.

Cheers
Happytrader

 

[lesm]

Re: A New Traders Journey to Success

Does any1 believe the statement below (quoted from the article) is valid?
Is anybody even pro enough to trade this way and is it even worth it for that extra few % ?

Instead of having the markets take your stop out, you exit when you know you are wrong.

Nizar,

You picked a good question.

In practical terms a stage 5/6 trader should know the answer.
What it means is that once you have sufficient information that a trade is starting to go against you that you close the trade out rather than wait for the 'stop' or 'exit' to be hit. Whether it is a small % or larger % depends on how far the exit/stop is from the current price.

This is an element covered in the "Phantom of the Pits" and Douglas's 'Disciplined Trader', a concept that a number of pure mechanical traders will have trouble understanding or coming to grips with.

Another question is, is it a technical or psychological topic?

Cheers

 

[It's Snake Pliskin]

Re: A New Traders Journey to Success

It's nice to read some sense.

 

[hypnotic]

Re: A New Traders Journey to Success

Thanks for the post Lesm,

Excellent read!

I can definitely relate to it ^__^.. No i can see how much work i can put in to become a better trader/investor.

Hypnotic

 

[Magdoran]

Re: A New Traders Journey to Success

Nizar,

You picked a good question.

In practical terms a stage 5/6 trader should know the answer.
What it means is that once you have sufficient information that a trade is starting to go against you that you close the trade out rather than wait for the 'stop' or 'exit' to be hit. Whether it is a small % or larger % depends on how far the exit/stop is from the current price.

This is an element covered in the "Phantom of the Pits" and Douglas's 'Disciplined Trader', a concept that a number of pure mechanical traders will have trouble understanding or coming to grips with.

Another question is, is it a technical or psychological topic?

Cheers

I agree with Les on this notion. I think as you develop you recognise the way markets trade, and accept that when the reason you entered a position has been invalidated, and that the current information and price action indicate a higher probability against your position, you wind out that position well before it hits the stop-loss.

I’m still reading Phantom of the Pits, but agree about Douglas’ perspective in “The Disciplined Trader” about the paramount importance of psychology and the more intuitive elements in assessing the market.

But this takes time to develop. I remember many times early on when I was trading in a mechanical mode that I would just see that the trade was done in the chart, but followed the trading rules and waited to be stopped out. It was after this happened a few times that I woke up while reflecting on the whole approach that I started to add a “discretionary exit” as a criteria. This of course triggered a major rethinking of my whole trading style.

Many mechanical trading approaches require that you stay in a position until a stop criterion is hit, which is central to this kind of trading. The rationale being that you back test and find a probability based on finite criteria using specific indicators, that you enter all trades which conform to the criteria, and exit based on the system rules which have been generated. Since the capacity to make this kind of decision requires that you look outside the mechanistic paradigm, while you remain mechanistic in your approach tends to rule out the capacity to make discretionary exits, relying o established stop loss criteria in a system.

Where you are more of a chartist, you tend not to be looking for a moving average crossover, or other mechanical signals. You can see a potential reversal in progress and can take early action to manage it. Also, by exiting partial positions, even when you get the bigger picture wrong, you can still profit from a temporary move in your direction before the underlying continues against you.

Now, as for the question whether this is a psychological question, or a technical question, I think it is both, but primarily a question of perception at the strategic level of the individuals approach, but founded on their capacity to recognise the key psychological issues, and their ability to take effective action in this regard.


Regards


Magdoran

 

[tech/a]

Re: A New Traders Journey to Success

Trading is 30% mechanical and 170% psychological. 200%

So just cut out the psychological element.
Why do so many have so much trouble with this?

Since treating trading like a business Ive never ever had an issue here.

Indecisiveness is the killer.
I'll make and do make decisions right or wrong instantly.
Procrastination/fear of loss---get used to it loss is more common in trading than winning.

All of these can simply dissolve.

The best single hint I can give to avoid psychological melt down is to trade well within your means.
Trading 5% of your nett worth is far less taxing on the grey matter than 90%.
Next is HAVE A DAMNED TRADING BLUEPRINT.

If you know how your trading is "Supposed" to pan out over 100s/1000s trades then you can see when it fails (If it ever does).
Pure discretionary trading your trading from comfort level to comfort level,you dont know wether those past 5 losses mean the way you trade is fatally flawed!!

 

[MichaelD]

Re: A New Traders Journey to Success

I remember many times early on when I was trading in a mechanical mode that I would just see that the trade was done in the chart, but followed the trading rules and waited to be stopped out. It was after this happened a few times that I woke up while reflecting on the whole approach that I started to add a “discretionary exit” as a criteria.

A most interesting point and one which I can relate to with many of my trades. However, in my opinion, this is an essential stage to go through in one's development as a trader - developing the necessary discipline to trade a plan must come before any element of discretion, since beginner's discretion is usually wrong.

(For me, I view the trades in hindsight that reversed quite obviously on the chart before hitting their stop as essential tuition fees.)

and ps. if you ask me, this is precisely where you and Tech/A diverge in your views.

 

[tech/a]

Re: A New Traders Journey to Success

A most interesting point and one which I can relate to with many of my trades. However, in my opinion, this is an essential stage to go through in one's development as a trader - developing the necessary discipline to trade a plan must come before any element of discretion, since beginner's discretion is usually wrong.

The whole question of "when" to exit cannot be clear until well after an exit has been triggered wether that be Mechanically or Discretionary.
mechanical trading simply tells you if you give back X to trigger an exit and do it with all your trades then you'll have an expectancy of Y.Alter that and you alter both X & Y so your back to not knowing until many trades wether youve improved or not.
You can of course have any number of alternatives in a mechanical exit strategy.You could have any discretionary criteria and of course test it or any combination of criteria---which ever comes first.

(For me, I view the trades in hindsight that reversed quite obviously on the chart before hitting their stop as essential tuition fees.)

You end up like a Kid in a candy store.Of course you'll find a "Better" exit in hindsite.The fact of the matter is the exit selected ALLOWS you to expect X gain.

and ps. if you ask me, this is precisely where you and Tech/A diverge in your views.

I'm way past the perfect entry and exit. There isnt one.

 

[It's Snake Pliskin]

Re: A New Traders Journey to Success

If you know how your trading is "Supposed" to pan out over 100s/1000s trades then you can see when it fails (If it ever does).
Pure discretionary trading your trading from comfort level to comfort level,you dont know wether those past 5 losses mean the way you trade is fatally flawed!!

Tech,
The elite few follow fact.

Here inlies the fallacy of the markets. Discretionary trading based on comfort rather than fact? Fact determines everthing.

"Fatally flawed" implies right or wrong thinking: analysis.
This is all in the discretionary context.

 

[tech/a]

Re: A New Traders Journey to Success

When is fact "Fact"?

Its my veiw that all we can do as traders is research and determine what we believe to be fact in each case.

Then its a matter of proving or disproving that which we accept as FACT.

 

[MichaelD]

Re: A New Traders Journey to Success

You end up like a Kid in a candy store.Of course you'll find a "Better" exit in hindsite.The fact of the matter is the exit selected ALLOWS you to expect X gain.

Agreed, but a BETTER multipronged exit strategy within the basic structure of a mechanical exit plan will allow you to expect X + additional % gain. As a typical example consider the late bullmarket blow-off, where a long term moving average (or a wide ATR stop for that matter) is often 50% below the wildly bullish price action, a huge give-back.

I take points from both your and Magdoran's views - I believe there IS a better way to trade than mechanical, that being discretionary, BUT I believe this can only be attained by first going through the required process of developing your own robust system and then improving on it.

The most survivable way for someone to develop a robust system, which then becomes a building block for future improvement, is to develop a mechanical system and trade it faithfully for some time.

However, rather than ignoring the lessons this mechanical system is trying to teach you, you must observe and accept the lessons it provides. At least whilst you're being taught you're making money.

Note - this is TOTALLY different to the beginner's approach to trading of trying one thing for a few trades and then changing it on a whimsy. This model allows changes, but only ones that are provably more profitable. These iterations take much time and effort.

I'm way past the perfect entry and exit. There isnt one.

This reeks to me of "I've got what I've got and I'm happy. Now I'll switch off my brain".

I believe that trading the markets is a perpetually evolving skill, building upon all that has gone before. Sure you can reach a point and then say "that'll do" and be satisfied and keep trading perfectly profitably. Many never even reach this point. I think there's more to be had.

 

[It's Snake Pliskin]

Re: A New Traders Journey to Success

When is fact "Fact"?

Its my veiw that all we can do as traders is research and determine what we believe to be fact in each case.

Then its a matter of proving or disproving that which we accept as FACT.

Hello Tech,

Think of it this way: when price is going up that is FACT. When price is going down that is also FACT. That is all we really need to know (excluding some other variables) Fact is Fact!

Snake

 

[tech/a]

Re: A New Traders Journey to Success

Agreed, but a BETTER multipronged exit strategy within the basic structure of a mechanical exit plan will allow you to expect X + additional % gain. As a typical example consider the late bullmarket blow-off, where a long term moving average (or a wide ATR stop for that matter) is often 50% below the wildly bullish price action, a huge give-back.

If that is the case then you should be able to quantify the benifit.

Width of stops can be an issue to those who feel they could have done better.As you know I am working on a "Switch" idea which can alert a time not to hold your portfolio open however when you bring in taxation issues with long term trading---simply sell it all then buy it back when the switch says time to buy again. At this time I havent been able to find any advantage but still looking.

I take points from both your and Magdoran's views - I believe there IS a better way to trade than mechanical, that being discretionary, BUT I believe this can only be attained by first going through the required process of developing your own robust system and then improving on it.

Could be so but until I can prove that to myself then I will trade with what I know is most profitable for me.If you and others believe that they have improved their trading by moving in a "Moggie" type direction fine.
Im still looking dont think Ive turned out the light.

The most survivable way for someone to develop a robust system, which then becomes a building block for future improvement, is to develop a mechanical system and trade it faithfully for some time.

Maybe,I guess you get yourself into a groove if you like,a mindset.

However, rather than ignoring the lessons this mechanical system is trying to teach you, you must observe and accept the lessons it provides. At least whilst you're being taught you're making money.

Its only part of the picture Compounding and Leverage hold more profit potential than exits and entries---improvement yes there will always be room.

Note - this is TOTALLY different to the beginner's approach to trading of trying one thing for a few trades and then changing it on a whimsy. This model allows changes, but only ones that are provably more profitable. These iterations take much time and effort.

Dont disagree but for me "Prove" is the word.

This reeks to me of "I've got what I've got and I'm happy. Now I'll switch off my brain".

I believe that trading the markets is a perpetually evolving skill, building upon all that has gone before. Sure you can reach a point and then say "that'll do" and be satisfied and keep trading perfectly profitably. Many never even reach this point. I think there's more to be had.

No not so but I'm a long way from accepting that trading from a mechanical foundation then introducing a discretionary element can be long term more profitable.


Snake

Think of it this way: when price is going up that is FACT. When price is going down that is also FACT. That is all we really need to know (excluding some other variables) Fact is Fact!

All very true but add time to it EG how long its moving up OR down relative to the way we trade will determine wether the FACT of improvement is there.
If a trade trades down 4 days in a row fact is its trading lower,is it within the parameters of how we trade?? if so then the fact is that we continue to hold if not then sell it.
If trading by the "Facts" as we know them become longterm un profitable then our facts have been Dis-proven.

I dont think all this is as clear cut as we would like.
It only becomes clear cut when we adopt something that we hold until disproven--if ever.

Can we improve on it---sure.
How good can it get?? dont know.

 

[tech/a]

Re: A New Traders Journey to Success

I'll be a bit scarce as my home computer is on the blink and will only be able to reply using my work one.

So enjoy my silence!!