The learning cycle for a newbie trader
Posted 10 June 2006 - 12:20 AM
Many of you don't know, but I used to be involved in training people in various things (not trading) and I thought I might share with you the journey that you take when beginning anything new. also if I show you my kind of writing style you might just buy my beginners forex book
This cycle is as true for trading as it is for learning to drive a car and consists of five components.
I'm going to take you through each stage so you can recognise exactly where you are in your trading journey.
Step One: Unconscious Incompetence.
This is the first step you take when starting to look into trading. you know that its a good way of making money cos you've heard so many things about it and heard of so many millionaires.Unfortunately, just like when you first desire to drive a car you think it will be easy - after all, how hard can it be?? - price either moves up or down - what's the big secret to that then - lets get cracking!
unfortunately, just as when you first take your place in front of a steering wheel you find very quickly that you haven't got the first clue about what you're trying to do. you take lots of trades and lots of risks. when you enter a trade it turns against you so you reverse and it turns again .. and again, and again.
you try to turn around your losses by doubling up every time you trade - sometimes you'll get away with it but more often than not you will come away scathed and bruised
Well this is stage one - you are totally oblivious to your incompetence at trading.Stage one can last for a week or two of trading but the market is usually swift and you move onto stage two.
Stage Two - Conscious Incompetence
Stage two is where you realise that there is more work involved in this and that you might actually have to work a few things out.
you consciously realise that you are an incompetent trader - you don't have the skills or the insight to turn a regular profit.
During this phase you will buy systems and e-books galore, read websites based everywhere from Russia to the Ukraine. and begin your search for the holy grail.
During this time you will be a system whore - you will flick from method to method day by day and week by week never sticking with one long enough to actually see if it does work. every time you came upon a new indicator you'll be ecstatic that this is the one that will make all the difference.
you will test out automated systems on Meta-trader, you'll play with moving averages, Fibonacci lines, support & resistance, Pivots, Fractals, Divergence, DMI, ADX, and a hundred other things all in the vein hope that your 'magic system' starts today.
you'll be a top and bottom picker, trying to find the exact point of reversal with your indicators and you'll find yourself chasing losing trades and even adding to them cos you are so sure you are right.
You'll go into the live chat room and see other traders making pips and you want to know why it's not you - you'll ask a million questions, some of which are so dumb that looking back you feel a bit silly. You'll then reach the point where you think all the ones who are calling pips after pips are liars - they cant be making that amount cos you've studied and you don't make that, you know as much as they do and they must be lying. but they're in there day after day and their account just grows whilst yours falls.
You will be like a teenager - the traders that make money will freely give you advice but you're stubborn and think that you know best - you take no notice and over leverage your account even though everyone says you are mad to - but you know better.
you'll consider following the calls that others make but even then it wont work so you try paying for signals from someone else - they don't work for you either.
This phase can last ages and ages - in fact in reality it can last well over a year - My own period lasted about 18 months.
Eventually you do begin to come out of this phase. You've probably committed more time and money than you ever thought you would, lost 2 or 3 loaded accounts and all but given up maybe 3 or 4 times.
Then comes stage 3
Stage 3 - The Eureka Moment
Towards the end of stage two you begin to realise that it's not the system that is making the difference.
you realise that its actually possible to make money with a simple moving average and nothing else IF you can get your head and money management right
You start to read books on the psychology of trading and identify with the characters portrayed in those books.
Finally comes the eureka moment.
The eureka moment causes a new connection to be made in your brain.
you suddenly realise that neither you, nor anyone else can accurately predict what the market will do in the next ten seconds, never mind the next 20 mins.
You start to work just one system that you mould to your own way of trading, you're starting to get happy and you define your risk threshold.
You start to take every trade that your 'edge' shows has a good probability of winning with.
when the trade turns bad you don't get angry or even because you know in your head that as you couldn't possibly predict it it isn't your fault - as soon as you realise that the trade is bad you close it . The next trade will have higher odds of success cos you know your simple system works.
You have realised in an instant that the trading game is about one thing - consistency of your 'edge' and your discipline to take all the trades no matter what.
You learn about proper money management and leverage - risk of account etc etc - and this time it actually soaks in and you think back to those who advised the same thing a year ago with a smile
you weren't ready then, but you are now.
The eureka moment came the moment that you truly accepted that you cannot predict the market.
Then comes stage four
Stage 4 - Conscious Competence
Ok, now you are making trades whenever your system tells you to.
you take losses just as easily as you take wins
you now let your winners run to their conclusion fully accepting the risk and knowing that your system makes more money than it loses and when you're on a loser you close it swiftly with little pain to your account
You are now at a point where you break even most of the time - day in day out, you will have weeks where you make 100 pips and weeks where you lose 100 pips - generally you are breaking even and not losing money.
you are now conscious of the fact that you are making calls that are generally good and you are getting respect from other traders as you chat the day away.
You still have to work at it and think about your trades but as this continues you begin to make more money than you lose consistently.
you'll start the day on a 20 pip win, take a 35 pip loss and have no feelings that you've given those pips back because you know that it will come back again.
you will now begin to make consistent pips week in and week out 25 pips one week, 50 the next and so on.
this lasts about 6 months
then comes Stage Five
Stage Five - Unconscious Competence
Now were cooking - just like driving a car, every day you get in your seat and trade - you do everything now on an unconscious level.
you are running on autopilot. You start to pick the really big trades and getting 100 pips in a day is becoming quite normal to you.
This is trading utopia - you have mastered your emotions and you are now a trader with a rapidly growing account.
you're a star in the trading chat room and people listen to what you say. you recognise yourself in their questions from about two years ago.
you pass on your advice but you know most of it is futile cos they're teenagers - some of them will get to where you are - some will do it fast and others will be slower - literally dozens and dozens will never get past stage two but a few will.
Trading is no longer exciting - in fact it's probably boring you to bits - like everything in life when you get good at it or do it for your job - it gets boring - you're doing your job and that's that.
You can now say with your head held high "I'm a currency trader"
I hope you've enjoyed this text and can recognise yourself in some stage or another - personally I'm at stage four now and am constantly making good amounts of pips - I've been trading in total for about 3 years and the first two were hell on earth.
for those of you reading this who stick with it, ill look forward to the banter we have together in the future when we are both bored to death during the trading day
Dupa 18 luni vine completare
Can't believe that it's 18 months since I wrote that thread - Jan 2005 it was.
Well, as they say 'you never stop learning in this game' and that's certainly true.
I thought it was time to add to the original thread with a new one - my last 18 months have been very interesting and many things have happened that I thought I would share with you that you may find useful.
At the time I wrote that thread I was an intraday trader and had been making money consistently for about 18 months - I thought that was it, I had made it as a trader and was at the end of my learning curve.
How wrong I was.
I don't think that this series of threads will ever end, I expect I will be writing another update in 2008.
When I look back at the last 18 months I cant believe how much ive changed from what I thought was the end of my cycle.
At the time I was daytrading several strategies which made me money. In the ensuing months I just kept on testing new ideas - reading systems on here and other forums and testing them also.
I got together with a bunch of traders in voice rooms and again started working on systems and testing. - again day in day out testing and trading - making money yes but never really getting closer to that dream that we all have of trading /easily, without emotion/ and having that millionaires lifestyle.
Systems development started to become easier when I looked at the market holistically - I.e. not tying myself down to a single timeframe and watching at a macro level as well as a micro level.
This resulted in the several screens I now have in my office so I could see all the timeframes at once - I was still specialising in GBP as to have more meant yet more screens and I thought that the study of cable would make me more than enough money.
I did what many of you will do in the future. I developed systems, gave some away and sold some also - The Hilda system was in my opinion my crowning glory - a system that I could trade on any timeframe on any currency. I spent the time and sold my system to many people.
When the fun of selling that and helping others died down I again started improving on it etc etc etc.
But then the realisation started to hit me.
All of this system work, selling etc wasn't getting me any closer to my goal of actually enjoying the money I was making.
You see a journey to a goal is a weird thing. all of the fun is in the actual journey to the goal and when you get there its very easy to start moving backwards to do it again.
what i'm about to explain to you is I think the final cycle in the journey to be a great trader and realising your ambitions. I may be wrong and find a Eighth step within the next two years lol - but for now this is the best I can offer you.
*Step 6 The wake up call
When the newbie trader reaches step five he/she thinks that's it. They now make money well, look back on the forums and chat rooms they've used for so long and with a smile see the struggle they have been through repeated day after day as new people begin their journey.
They see the highs and lows that they experienced, the heartache, the 'head in the gas oven' moments and the movement from sheer despair to brilliant exuberance.
They continue to design systems to test - spend hours upon hours of hand testing with a smile - they know that no amount of computer testing is good enough to give you the confidence to trade the system properly.
They test and test - still believing that there is a system out there which beats the one they are using now.
They continue to get the latest designer indicator - hell, they even pay for them now as they know that a few hundred bucks for an indicator is worth it if it increases the take.
Trading becomes a real chore and the rot starts to set in. Here they are watching charts all day long for that setup which pays the mortgage and buys the new car or house.
The system they are using is still indicator based, still needs a shedload of charts open and still relies on a good charting feed.
Even though they don't realise it for the most part, although their system is mechanical they still have decisions to make - when to close a trade, when not to trade, avoid the news etc etc.
One day they wake up.....
*Step 7 - Learning NOT to trade
Yep, you read it right.
what happens to a trader in this cycle is that they get so wrapped up looking for improvements to their trading that they forget what they started trading for in the first place - for freedom.
Yet here they are every day sat by the pc, still after 4 or 5 years testing new stuff, taking trades and even though they don't realise it making discretionary decisions on their trading.
If they want to go out for the day of course they can - and they can enjoy their money. but whilst they are away they make no money because their systems main component is themselves.
Here's what's happened.
The definition of success according to Earl Nightingale is the realisation of a worthy goal. however success isn't all it's cracked up to be.
The journey to this point in the traders life has been exciting, exhilarating, despairing and all of those things we call emotional.
This emotion is like a drug and we get used to it - it takes so long to reach our goal that the highs and low's become a part of our personality.
when we reach the goal - we can't stop.
until the wake up call of course.
At this point we realise that the answer has been staring us in the face from every book we ever read, every forum we visited and in reality every trade we ever made.
In stage seven the trader realises he needs to work on one more system - the last one he will ever work on. (I think!)
It will be completely mechanical. No user decisions to make, no worry about news, no worry about what the 'experts' say or what's happening in the news.
Now some traders will pooh pooh this - many city traders work on fundamentals etc etc - but ask yourself the question - if they are so good why aren't they trading their own accounts?
Anyway, this is my experience and not theirs - these two extra steps are what's happened to me and that's why I did it in a new thread as opposed to tagging it onto the first one which is kind of generic.
so in stage 7 the trader starts to work on this totally mechanical system and after a lot of backtesting by hand and parameter changes etc etc he finally has it.
he can now work for a few minutes a day or even automate the system and not work at all. if he wants to go out then he makes money whilst he's out.
This is the stage I'm now at and happily enjoying the money I'm making and I may be wrong but I think that's what the majority of people who come into this business would like to happen.
This stage will make me rich beyond my wildest dreams. but what you reading this have to realise is that you MUST go through all that shit to get here - it's like going from being a teenager to being an adult - there are no short cuts.
That's why I laugh when I see people posting that they are consistently profitable after a few months or even a couple of years - they may be, but it wont be for long. I think that even if you say this in chat rooms and on forums like this you know the truth yourself.
So that's the last two stages at the moment - might get bigger with more steps in the future though cos I don't know what I don't know yet.
you may be at this stage and you may be wondering how you will know if you have a truly mechanical system - well if your system is truly mechanical you should answer the following questions with a yes.
1. do you have a clearly defined entry point that wouldn't change no matter who was trading the system?
2. Do you have a clearly defined stop level that would not change no matter who was trading the system?
3. If NFP or a similar high volatility news item was due in 3 seconds and your system signalled an entry would you take it?
4. Do you have a clearly defined way to close your trade that would not change no matter who was trading it?
5. could you tell your 12 year old son what to do to trade the system and his results would be no different to yours?
If you answered truthfully 'yes' to each question then congratulations
you have a truly mechanical system - now you've got to make sure it makes
money - that bit is up to you.
Hope this helps some out there who are struggling away. Know that there
is a light at the end of the tunnel, but it's a bloody long tunnel!
see you at the light end
From The Desk Of ...
As dori sa raspunda in special traderii cu o vechime mai mare, va regasiti in acest articol. Ati parcurs toti acesti pasi?
Posted 26 April 2007 - 12:23 AM
1 We are intrigued by the market and start to do some preliminary reading and research.
2 We buy a book or two and perhaps some newsletters.
3 We find something we quite like and start doing some research using this particular technique.
4 We dabble a bit in the market, trading every now and then, mainly losing money, but not much, and having the occasional winner.
5 We generally forget about the losers and congratulate ourselves on our winners. Convincing ourselves that once we learn the techniques better there will be fewer of the former and more, lots more, of the latter.
6 We keep manual charts, which may become quite large physically, and maybe plot a few indicators manually (this was before computers became quite so available).
7 We spot an approach to the market we think cannot fail to win!
8 We start to trade actively.
9 The results make it clear that it is not as easy as appeared to be the case. There were a few key points we failed to fully appreciate.
10 We continue to trade. Results are fairly indifferent (to bad) but there are enough profits to keep the interest up.
11 We continue to expect great results.
12 Trading volume increases and the amount of money in the market grows.
13 We continue to read and take newsletters, but our research has only scratched the surface. We still have no real idea what we are involved with.
14 Our technique scores a major success (the ‘87 Crash), but our lack of trading skills means that we do not profit from it as we might.
15 The market begins to instill a little fear but we have yet to learn the first key lesson.
16 We keep trading in size. We are overtrading and clearly act as a fugitive from the law of averages. It is only a matter of time.
17 We make a big profit. It is all going well, we start to get overconfident.
18 We suffer a big loss. Psychological problems start to develop.
19 We buy a computer and start to monitor many more indicators.
20 We look at other techniques and other markets.
21 We get wiped out.
22 It becomes clear this is not at all as easy as it looks.
23 We become impossible to live with.
24 It also becomes clear that the information available (in 1987/88) is not much use to those seeking to make money from trading.
25 We determine to fill this void and look to create a newsletter telling it how it is.
26 We work with an analyst in the USA. Note how inappropriate this is for someone who wants to trade. Much better to work with a trader!
27 We continue to trade, but in a much reduced manner.
28 We start our newsletter which is an immediate success.
29 This requires a lot of research plus a lot of self analysis, but it is still not clear that trading is a psychological issue and that the externals (systems/software/computers/ brokers/advisers, etc.) are almost completely irrelevant until the internal is set up right.
30 We are plagued with fear and have no clear methodology.
31 It becomes clear that judgmental trading (without a clear methodology) is a dead end.
32 We start to look for a suitable methodology.
33 Those available on the market do not seem to be suitable and so we design our own.
34 We start to trade using a clear methodology. This is not easy but some things start to become obvious.
35 We find ourselves trading for no good reason (something that was impossible to detect before we had a clear methodology), but then realize that it is due to an argument earlier. Self esteem clearly plays a role.
36 We realize that the key element in trading is our own mentality. Now we can start to make some real progress.
37 We improve our systems and start to make some money on a one contract basis.
38 But we are still fearful and this remains a big problem. We learnt, some time ago, the necessity of cutting losses, we cannot get to the second secret until we deal with the fear.
39 We keep trading and we continue to do OK, we start to get more confident and the fear starts to dissipate.
40 We take another big hit.
41 We feel awful and think we should perhaps give up, should perhaps have given up some years ago when it all went wrong the first time.
42 We keep trading and determine not to get overconfident again. We reinforce the stress management systems we had to learn in the early days and keep meditating (essential to trading success). We realize the importance of remaining humble and also of being an “empty vessel.” If you are full of yourself there is no room to learn
43 We meet another trader who becomes a mentor. He introduces a new (to us) technique (Market Profile) which immediately “fits.” This is because we now have the right attitude.
44 We build on our successes. Systems improve, results improve, and our mental attitude improves, fear becomes less of a problem.
45 We decide to see a trading coach/psychologist (Adrienne Toghraie) and have an initial meeting in Switzerland.
46 We make a big profit by letting profits run. We have managed to do what every successful trader must. Can we repeat this trick?
47 We start to move away from fear, and start to become risk orientated.
48 We realize that mental attitude is all. We see that it is vital to be relaxed, we reduce position size, again!
49 We spend a few days in the USA working in a group with our trading coach/psychologist.
50 We begin to make money with consistency.
51 We get a little overconfident, again! But this time we realize the fact and the damage is limited. But we learn, again, to remain humble.
52 We start to trade almost subconsciously some of the time. We are becoming expert.
53 We know there are still many challenges ahead but we are confident that we will deal with them.
54 Money ceases to be a problem, we truly live in a world of abundance.
55 We find that our lives improve across the board and that we are achieving in a wide range of areas.
Extras din "John Piper - The Way To Trade" cap. 2
Trading is hard and will only work after years and years of blood, sweat and tears!
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