• Jan

Stages of traders development

Updated: Nov 23, 2019



One of the most common ways to see beginner traders approach the market is by testing out different trading indicators that are either part of trading platforms or provided by trading educators. Almost every novice trader will find him/herself in the shoes of checking and playing around with multiple indicators, trying to find the one that suits the best, or makes the most sense. It is in nature of every human to be curious to degree, which is a great quality to have for sampling and figuring what might or might not work.

However the issue is within the case that majority of traders will decide on what makes most sense for them to use, rather than what the data confirms to have edge. People have nature to think that if something makes sense it is already real. Which of course is a false perception very often.


Thus novice traders journey begins by checking multiple videos of different strategies, different trading approaches, trying some of them out and eventually sooner or later moving to something new. And the reasons why traders move on in first place is because they do not confirm / backtest the edge of strategy (because they just dont, or because they dont know how to) or because they were using strategy that is not well compatible with their personality and is exploiting too many weaknesses within the personality of that trader.

It is important to use the strategies or trading approaches that highlight the strength of such individual and avoid as much weaknesses as possible. Additionally to that the "strategy" needs to have an edge, without edge the traders personality strengths wont matter at all.



Common personality strengths in trading



This is a process that might require some time to develop since many (especially younger individuals) will not know what their real strengths are. Over time majority of traders will figure out, especially if they perform enough of frequent trade executions it should become clear what the real strengths of each individual are to figure it out for him/herself.


Three of the most common strengths that many good traders have are:

-high speed of processing the information

-discipline / patience

-ability to make very quick decisions if needed to


What is so good about those strengths is that you do not have to be born with those qualities to have a chance. All of the 3 listed strengths are the one you can learn and improve on with enough of repetition, learning, preparing, forming right habits that over time actually improve on those 3 skills. Most professional sport players or video game players excel at those 3 because of the fact that the amount of reps they put in and practice over time improves this skills drastically. They do not get stressed out easily, they can make very quick decisions in tough moments and process the macro flow of game quickly.

My point is, you need to be allowing yourself to put the reps into trading to see those 3 skills improve, do not try to take shortcuts, because chances are you were not born with abundance of those 3 skills ,statistically it is unlikely, on every 100 traders maybe 1 will be born with abundance of those, the rest will have to work on it to improve to capable level over time.


There are essentially many other attributes that each individual has which could be considered as strong points but my intention was to highlight the 3 most important strengths in trading that are mostly self-developed over time with practice / plan / habits. Because all the rest of strengths you might have already been born with and they have been gifted to you (or you developed them before tackling the markets) and there is no need of pointing them out (objective, reasonable, self-aware, self-control or many other such "good" qualities), because they are already there. Or to use a common saying along the comedians: "The point of comedy is not to joke about good stuff, but rather to joke about bad stuff, because the good stuff is already there to make you feel good".

In trading the focus thus should be on improving your weaknesses (or avoiding if possible), the strengths you have are there already or will improve over time naturally as the reps are put in.


Quick overview of developing those 3 skills


Again to note, all 3 skills are mainly developed with time, but just a brief overview on how trader actually is improving those skills over time, based on specific practices:


-speed of processing information:

This comes with practice of learning and soaking complex topics and practicing getting to the straight middle conclusion of what the data is trying to tell you. Not getting lost in the side alleys but coming to core conclusion. This takes a lot of practice and repeating studying subjects / data out of your knowledge area and keep coming to the conclusion, then with practice once you are met with similar data you will know which data is potentially okay to ignore and go straight to the middle of what is important. An example might be reading 10 page long paragraphs of stock news (for specific ticker, such as earnings report), or reading 50 pages long macro report on state of countries economy (IMF publication for example) , over time with practice you learn where exactly should your primary focus to detail be. In a way you are faster to jump over straight to core. That is obviously not the only component of what goes into speed of processing info, but it is the most common one seen in trading.


-discipline / patience:

Patience comes by developing large enough playbook to be fine with letting plays go and not have FOMO, it takes time to get few plays in playbook. Also the amount of traders capital might affect patience, with time chances are trader might be more capitalized, or at least it is the case on average. Patience also comes by studying your own personal trading data to know where exactly you are strong, to really wait for those plays patiently because your performance data is telling you to do so. Again it takes time to collect such data and make enough mistakes.

Discipline comes within the habits outside of trading on average day (many things to list), but also inside trading by creating proper risk management plans and following up it enough time so that you develop consistency of discipline. The most usual driver that shapes traders discipline is the pain, the pain that large losses leave from where trader was trading completely un-disciplined. Over time the pain stacks strong enough that trader is left with no choice but to start figuring out ways to start respecting the discipline, again the time will most likely be the leader to guide you on that.


-quick decision making:

This mainly comes from repeating learning or executing same pattern over and over again. With more executions the decision making progress is no longer fully conscious, it starts to become slightly more automated, the part of brain that handles habits actually starts to handle portion of the task which makes decision making that much quicker and more automated. You freeze less over time as the complex decision making actually is put in task of automated thinking process in brain. However this only applies if trader really is trading very exact, specific pattern without significant variations over time. You start to cut losses much quicker, you are more aggressive on entries knowing when to really hit and so on...


Success is process of staged process




In learning process one cannot skip stages of development. You need to learn from right person / material based on your current stage, seeking information that are around your current stage/skill level and not skipping into too advanced areas without building first solid foundations. Shortcuts to expertise levels lead to confusion and under-performance, leaving one with big knowledge holes that will hunt you across your trading journey.



1.Novice


Novice trader should focus fully on learning the basics and sampling the strategies as much as possible (check check check, test test test,).


2.Intermediate


Intermediate trader should focus on finding what his current strengths are and excluding the strategies that play too much on his weaknesses.


3.Expert


Experienced trader should not shy away from either of things as long as he is testing out and exploring and improving all along.




Examples of too much stage skipping:



1. One cannot be learning chart patterns if you do not have knowledge on what Japanese candlesticks are, because you will lack the important component of how volatility+time are baked into chart on small scale of the moves.

Example of skipping learning novice area of market knowledge (candlesticks) while trying to execute or learn on intermediate area (chart patterns).


2. One cannot be learning and trading / scalping stocks without having full knowledge on all Level 2 components (bid/ask/spreads/liquidity/limits/time and sales...).

Example of skipping novice area of knowledge while trying to get capable fully at intermediate level area.


3. One cannot be forming valid opinion on potential financial crisis in emerging market economy without having knowledge of how inflation works, M0/M1 monetary supply, external debt markets etc...

Example of skipping intermediate area of knowledge (inflation, M0...) while trying to form a complex advanced / expert opinion such as potential financial crisis.


And in trading world one can see very often of such skipping, where traders or investors skip way out of their actual stage area of expertise level, trading or forming opinions on.



Know what stage you are at



Be honest with yourself as much as possible to identify your approximate stage. Traders learning journey should be taken with right steps, just as your journey in school is taken step by step progressing from basic to medium to advance knowledge with the right structure and progression. It is often seen in trading world that traders completely skip certain basic areas in trading and just move straight pass into areas of more advanced knowledge which might cause problems. As mentioned before that is due to fact that typical school/university program has right planned structure, while trader mostly has to figure it out by him / herself. It has been proven over and over again that in fact best learning approach is structured approximately like this (example set for novice trader):


Trader X, novice trader:

-70% time spent learning and researching basics

-20% time spent learning intermediate knowledge

-10% time spent learning advanced / expert knowledge


Meaning that this beginner individual does not spend full time learning just basics, instead he is one foot into intermediate but fully grounded still meanwhile in basic. Slightly leaning forward dipping into challenging info, but spending most of time studying the area that he is currently staged at which is novice / basic info.

If those numbers are tilted too much into area of intermediate or advanced knowledge it will leave serious knowledge gaps.



Thus as a trader you should know how much time you are in-putting into each subjects, and you should know if you are spending too much time studying advanced knowledge (macro-economy, short squeezes...) yet you still did not grasp many novice stuff about market (what is bid/ask, how does volume work...), this might yield problematic knowledge gaps and can cause under-performance. Generally the things that are in front of your eyes every day on charting platform, or your news feed are much higher priority to learn than concepts which you are faced with rarely. Structure the learning path correctly, but always challenge yourself a bit every day, stepping one foot into un-comfortable area of knowledge. 70-20-10.



Sampling too many strategies too quickly



Often traders will move from strategy to strategy relatively quickly, trying new things out as the previous tried approach leaves them un-satisfied with results. Testing many strategies is not a bad thing, in fact it is crucial to find what works for you, but the problem is that traders just move too quickly into next thing, without understanding how sampling process works or how edge development works.


What is common is that trader will try new indicator or price trading method suggested from someone, then place few trades or perhaps 20-30 trades and eventually loose the interest, moving to next thing. The issue here is that not enough data was collected to even confirm if strategy could perform. For minimum required data sample should be considered 100 or 200 trades. Only in very complex strategies it is possible to use smaller sample size than that.


Another issue is that traders just usually do not bother with forming backtest on historical plays / charts. They just assume that strategy might work, just because it makes sense. Just because it makes sense, it does not mean it has edge.


Strategy / indicator / approach has to be correctly stress tested, test has to be very robust and objectively defined so that trader is not gathering wrong data on back or forward test.


But the real issue only comes now. Especially price action based approaches / methods are hard to backtest or even forward test in some cases, because they are often too complex with too many variables for un-experienced trader to even figure out how to structure proper stress-test on such method. This also in some cases applies to indicator based strategies if they are defined trough many variables which are not related to indicator itself (for example using VWAP+fundies+price data) which might be challenging and confusing for un-experienced trader to even back/forward test to confirm if strategy performs. This is something that takes practice to figure out how to structure proper backtests, takes a lot of mistakes and plenty of work. In the end most traders wont bother, they will move straight to new strategy once the previous one does not yield the results they were promised of or were expecting of, which is not surprising since if you do not have data on strategy, you also have no trust in its edge.


Bellow conceptual example of theoretical example of SPY strategy, for those who want to take a small challenge, try to backtest or forward test such strategy as a practice if you have never done back/forward test before.


Asset: SPY (SP500)

Strat components: VWAP indicator, Volume indicator, Price (high breakout)

Entry/exit rules:

1.Price has to be above VWAP

2.Volume on a day (since open) has to be above 16 million

3.Entry on first breakout of current high that matches n.1 and n.2 requirement


Know your weaknesses




Do not execute strategies that play too much on your weaknesses, that will make trading much more challenging (not in a good way). The correct strategy is the one which suits you well and it highlights much more your strengths than it does weaknesses. Especially if you have alternative strategy that provides you a way to avoid being played at your weakness you should consider checking and sampling the alternative strategy.


In trading we all learn from other traders / investors / economists / etc...and therefore you need to be willing to experiment a bit. If individual that you are currently learning from trades with style that is not suitable for you due to specific weakness you have you need to try your feet elsewhere, not because the knowledge provided from that person might be poor, but because perhaps your own weakness is too much to handle such trading approach.


Someone people have personal strengths that are suitable for dip buying, while others have much more capabilities to be suited for breakout buying. Your strengths and weaknesses will play component towards what is your better fit. Also goes to say, in some markets or assets your preffered trading method might not work, so you will need to find either other market or be willing to find another route.


For example if a person was trying to learn fast scalping approach in futures market (1-3 ticks) and such person had specific weaknesses against such approach:

-needs a lot of time to form decision on entry or exit after being in trade (hates fast decisions)

-gets in very bad mood if loosing on single trade

-gets annoyed if people interrupt him while speaking or forcing him/her into quick decisions


Such weaknesses above would be hardly compatible with fast scalping method, a trader trying to perform such style would be in a dire set of frustration. Thus one should identify his weakness to choose the better trading style. And always keep in mind to experiment, as mentioned above be 70% in your comfort zone and 30% out of it, that is the key to progress and explore because you might over time improve your weaknesses and open yourself to new trading styles.


But the general rule is (from my experience of mistakes): It is very important not to ignore your weaknesses. Acknowledge them and decide how to move on and what style to adapt to.



You will have to work on some weaknesses and reduce them




Some weaknesses that are generally applied to any trading style are the ones that trader simply cannot ignore or avoid. Those are the most important ones that HAVE to be worked on, trying improving / reducing them. For example personally one of my weakness was very poor discipline. It was reflected trough my initial beginner trading time very strongly, each collection and review of past trades has shown clear indication of lack of discipline (having 3 decent trades and then having 1 trade where loss cutting was completely ignored, repeat...). My conclusion there was, that i will make it despite that weakness being present, i just need to input more time into learning markets overall. (i was honest and pointing the right weakness, but coming to totally wrong conclusion).

This was obviously wrong conclusion which i realized one year later. And that was the time i decided to actively start forming proper set of habits and a plan on how to improve discipline overall (not just in trading). Some general weaknesses are just un-avoidable and you will have to confront them and form a plan to improve (or ask someone for help on task).


If you generally lack discipline in life, have anger issues, are very moody person with big emotional swings, cannot take constructive criticism while trying to improve....

Any of such weaknesses will have to be addressed seriously with forming / using the right plan formed by yourself or someone else helping you, because in trading industry those will haunt and follow you every day, and without addressing them they will hurt your trading performance day in and day out. Try to be objective to yourself, if you are generally honest and objective person then you can find your own weaknesses and start working on them, but for some men they will need outside person as they might not be honest with themselves enough to really point the weaknesses out. At the end....the data does not lie as long as trader is doing trading reviews correctly, trade reviews will point you to where the issue / weakness is. The sad truth however is, many traders do not journal or make reviews...




Best performers spend more time practicing than performing




This is true across business, sport and elsewhere. Most traders sit behind live market trying to make sense out of market / trade and once market closes they are done. Then repeat the next day. Just because you are observing live market it does not necessarily mean that you are learning. Without the context of what you are observing the lessons might be mediocre, that is why sampling (testing) the strategies / approaches and data is important to speed up learning curve. This is the core reason why traders who keep sampling large amount of data or strategies learn much more than the ones who are just watching live markets. Frequency of executions / repetitions / sampling is what turns trader to finding new clues or edges or confirms no edge at too easy to be true strategies.



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