Getting StartedPsychology

The Evolution of a Trader

At some point, if they last long enough, all traders discover that successful trading is not the inevitable result of a good trading strategy or system. If all we needed was a good system or indicator we would all be successful traders. Yet clearly we are not, far from it, there are very few traders making their living consistently from the markets.

Technical analysis is a vast and well researched subject. Many minds have poured their heart and soul into searching for the holy grail of trading: the system, strategy or indicator that will yield to them unlimited wealth and glory. Yet with all this depth of knowledge readily available, trading profits remain as elusive as ever.

System Vendors and the Holy Grail

If we were to take a scientific approach to evaluating technical analysis we would have to conclude that it is of limited value. System vendors, though, will continue to exploit our desire to believe that there really is some secret knowledge that will enable us to transform into super traders as soon as we expose ourselves to their secrets. It is a very tempting fable to believe in, it offers an answer to our prayers and our problems, it engages our ego (how great to conquer the markets and escape the drudgery of work etc..) and it allows us, briefly, to relinquish the painful self-doubt that we are unconsciously fighting. The system vendors flatter and deceive us in the same way that street sellers sell exclusive, stolen perfume, which is usually no more than bottled water. We are easily deceived when we are told exactly what we want to hear.

Let us pretend that a system vendor really has a system that works as they claim. Let us also assume that his cup truly does ?runneth over? and he sincerely wishes to share his knowledge as a way of repaying his good fortune; and finally let us assume that he charges a fee, not for his own gain, but to ensure that his clients really take him seriously. Assuming all this, does it make sense to make his knowledge available in a book or a seminar? We all have discovered that trading is not easy and one of its biggest challenges is following our signals, be they based on an indicator or our intuition. It is so easy to doubt our signal when the moment to act arrives, we hesitate and the opportunity is gone. So having learnt our hero?s strategy we then have to become adept at implementing it, which brings with it a whole host of problems that only become apparent as we attempt to execute the system.

Now the issues that get in the way of implementing a strategy are not issues that any system vendor can resolve in a book or a weekend. In fact the system vendor would have it that all our previous problems with trading result from not having a good enough strategy, which of course is a problem he can easily solve for us. The basic premise of the system vendor is that all the psychological issues in trading, in fact all the problems we have in trading, are a consequence of not having a really good system or strategy.

This I do not believe, it is like claiming that we could all play golf like Tiger Woods if we had a certain set of golf clubs, or that we could achieve the same level of success as Pete Sampras if we used the latest racket. We all need golf clubs to play golf or a tennis racket to play tennis, no question; but they do not determine our success. Tiger Woods would still be a great golfer even if he was handicapped by playing with antiquated clubs, but no novice golfer is going to be transformed into Tiger Woods simply by buying the right equipment. If the system vendor has perfected the perfect trading system and if he has developed the skill to successfully implement this system, surely the most effective method to share his good fortune would be to create a fund that we could all invest in. That way the vendor can ensure that we all receive the full potential of his system without any effort on our part, without us having to overcome the bigger challenge of implementing the system ourselves. Presumably for every client who learns the system only a few manage to implement it successfully, with the fund option every client gets the full benefit of the system; so why not start a fund, a much better way to share the fruits of his good fortune.

The other question that is frequently asked is why doesn?t the vendor display the full results of trading the system? Instead we get comments like ?97points this morning, thanks a £?grand!? from a satisfied punter. In order to evaluate the effectiveness of any system we need to be able to see the results of every trade, over a significant period of time, so we can compute the necessary statistics. If a vendor has done so well, why can?t they publish their own verified trading results? Some do, but only in snippets, we need the whole lot; and why not if they have had the results they claim, what have they to lose?

The reason that vendors do not publish their results and the reason that vendors do not start funds is that their systems do not work consistently. They work periodically sure, they can find numerous examples of successful trades, but they do not work consistently. But even if their systems did work consistently they do not publish their results or start funds as they have not been able to overcome the implementation and execution hurdle, they are not good traders. They may be good researchers, good teachers and good sales people, but they are not good traders.

System vendors can teach us how to market products, they can teach us how to write sales letters, they can teach us how to present, they can teach us many things, but they cannot teach us how to trade. They cannot teach us how to trade because they have not learnt how to trade, all their energy has been spent researching and developing systems and the only way to make money from these systems is to sell them.

Learn through experience

Learning to trade has nothing to do with researching and developing systems anymore than designing golf clubs has to do with learning to play golf. Trading, like any endeavour, any skill, is learnt through doing. We learn through trial and error, through having experiences and evaluating and learning from those experiences; and of course, our learning is accelerated if we have the support and advice of someone who is further along the path of development. The skills of trading are to do with execution, and implementation, the doings of trading. The problems we all experience in our trading, problems that are popularly referred to as the psychology of trading, are the challenges of trading, it is these problems we surmount as we develop our trading skills. The skills of execution are the equivalent of the basic shots and strokes that make up the games of golf or tennis. There is no point having a strategy in tennis if we can?t execute the complement of strokes we need to be able to play. Knowing that we need to hit the ball deep and move our opponent from one side of the court to the other is of no value if we cannot hit the basic shots.

There is no point having a trading strategy if we can?t trade and no novice trader knows how to trade. The problems we all experience in trying to make money trading stem from the fact that we do not yet have the skills of a trader. If all we needed was a system we would all be wealthy; no, we need to become traders.

If you have read the Market Wizard books by Jack Schwager, you will notice that each of these very successful traders has a different approach or system, yet they are all successful. Their approach is not the common factor that determines their success. The common factor amongst them is their trading skills. What are these trading skills and how do we develop them in ourselves? – that is the million dollar question. We need to look to ourselves for the answers, what are the problems that we experience, what are the behaviours that result in our lack of success and our failures? It is overcoming these behaviours that move us along the path of the trader.

The basic rules of trading are cut your losses short and let your profits run, a losing trader is not doing one or both of these. When we have learnt to ruthlessly cut our losses and have the restraint to run our profits, only then are we traders. And it is during the process of our development, as we demythologise the market, that we start to have the observations and make the distinctions that lead us to evolve and refine our trading strategies. If we could have the strategy of a successful trader delivered to us on a plate would it be of any value to us? I don?t believe so; in the same way we could not implement Tiger Wood?s strategy, or Pete Sampras?s, because we do not have their skills, so we could not implement another traders strategies without their skills. We must develop as traders first and in so doing we will naturally evolve our own unique style and approach to trading success.

Developing Trading Skills

To develop these skills we need to get our feet dirty, plunge into the markets and have experiences. These experiences are all good; they are the feedback we need to gauge our current state of development.

Without feedback we have no means of progressing. When I first started to play tennis I did not go straight into a competitive game and try to win, I started by learning the basic skills of tennis, the forehand, the backhand and the serve. As a novice it was normal, expected even, for me to hit the ball repeatedly in the net or hit it sailing out; this just indicated that I needed to work on these shots. Imagine taking this approach to trading. Lots of losing trades is to be expected for the novice trader, it is the first feedback, which reinforces the fact that the first skill of trading is to cut losses short. A novice tennis player needs to learn to control the ball so that it lands in the court; the novice trader needs to learn to control his losses. This is how we learn; it is a constant cycle of trade ? feedback ? adjust. So what are the practical steps for going about the business of developing trading skills?

If you are new to futures trading there are certain facts you need to know. This information will be covered in most good introductory books and seminars. When you have the practical information you need, open a trading account and start trading. As a novice it is helpful to trade a simple, logical system. This appears to contradict the stance I took against system vendors above, but what I am talking about here is a systematic way of having a view of the market. My objection to the system vendors is that they maintain that their system is all that is required to be successful, whereas in reality it is the ability to implement a system or strategy that determines success. As your trading skills evolve, your ability to read the market will evolve; but until then you will have no valuable opinion, so a simple, logical system will give you a reason to buy or sell.

In giving introductory seminars I have in the past demonstrated a couple of workable systems, which are a good starting point. In attempting to trade these systems two things happen; firstly you find out the issues you have that you need to resolve in order to progress as a trader; and secondly in the course of trading the system you start to make observations and distinctions that will enable you to be more discerning about picking trades. The issues that you come up against are the feelings that arise that prevent you from executing your system flawlessly. You need to neutralise these feelings so that you are no longer a victim to them.

Get help

I believe that to have some sort of support while developing as a trader is vitally important. A trading coach, for want of a better phrase, will help you to navigate when you feel lost, and will give you an objective perspective when you are wallowing in doubt and uncertainty. As a novice floor trader I found the support of my backer essential in developing trading discipline. Support does not have to come from a professional coach, two traders could support each other, or a novice trader could seek out a mentor.

In summary:

  • We need to have the knowledge of the rules and tools of the game.
  • There is no system or strategy that will turn a novice or losing trader into a consistently profitable one.
  • Don’t waste money on systems, they have very little value in themselves.
  • Systems, though, are an effective starting point to develop from, but be aware that no system confers the skills to apply it, these must be developed over time.
  • Trading is a game of skill, these skills are developed through experience, feedback and the ambition to evolve.
  • Finding some form of support will speed up our progress.

Reprinted with the kind permission of the author. 

Malcolm started trading from home in 1992. After a disastrous start, trading an optimised 3 MA cross over system, he learnt to develop an approach to trading based on his own market observations.In 1993 he started on the floor of LIFFE as a trainee trader, and developed to become a fully qualified local (independent trader), trading for his own account and, in his last years on the floor, for a trading firm.The biggest challenge for him in trading, is to be 100% honest with himself; self deceit is the primary cause of losses in his trading.Malcolm's course, Day Trading E-Mini S&P Futures, is available in the T2W Store. 

Malcolm started trading from home in 1992. After a disastrous start, trading an optimised 3 MA cross over system, he learnt to develop an approach t...

Beach Runner

Active member
128 2
I always find Malcolm Robinson's writing thoughful and interesting and this is no exception; I enjoyed reading it. There are, if one searches, quite a few articles around online authored by him.
 

trendie

Legendary member
6,208 996
The whole point of his article is to develop your own style, and not to rely on system vendors.
He makes a well-reasoned argument as to why not.
Fair enough.

But, if you log onto his website, "masteryoftrading", there are links to some system vendors !!
( vantage point, for example )

I find that quite amusing.

Nonetheless, his article is quite good.
Nothing new.
Nothing controversial.
Common sense.
Generic.

edit: good anologies between trading and golf / tennis, re:skills and tools.
 

s-a

Active member
111 0
I like this topic a lot. One statement that I have problems with is the phrase, "cut your losses short". What is short? I'm a FOREX trader and I used to put in 30-40 pip stops. What happened was each loss was nickel and diming me to death! Upon backtesting my trades I realized that I would have been far better off using a wider stop, somewhere in the 100-150 pip range. I trade of 240min bars and have found that using a ATR(20) * 3 to determine stops has drastically increased my profits. Just my 2 cents though. Is this still cutting your losses short? Maybe, because I stick to my exit, but when I used to hear that phrase I always imagined it to mean that one must use a very small (short) stop loss.

HG
 

trendie

Legendary member
6,208 996
s-a,

I am going through the same issues as you did, re: cutting losses.
I was using an arbitrary 30-pip SL.
I now understand, that I need to look at the bigger picture, ( bigger time-frame ), to get a sense of the ranging to determine a more appropriate SL.
Yes, ATR seems to be the logical approach.
 

Zenda

Well-known member
491 10
As a trading instructor and someone who sells a trading system (£39.50) not £5,000 - I agree with every word Malcolm writes in this article - Malcolm always writes in a clear and consise fashion - based on real experiences. Always a great read, and sensible to.
 

Beach Runner

Active member
128 2
s-a & trendie,

Me too! Realised I was using too narrow a stop (on Eurodollar spreads - which hardly ever move anyway). And I think one has to adjust the stop according to the market - and I know that's a pretty idiotic thing to write, but I'm probably not the only one who forgets the most basic stuff.

And I agree with Zenda's comments on Malcolm Robinson's writing.
 

tcksee

Junior member
40 0
Very good article should be read by everyone could save many people
much money
 

dbphoenix

Legendary member
6,952 1,244
s-a said:
I like this topic a lot. One statement that I have problems with is the phrase, "cut your losses short". What is short? I'm a FOREX trader and I used to put in 30-40 pip stops. What happened was each loss was nickel and diming me to death! Upon backtesting my trades I realized that I would have been far better off using a wider stop, somewhere in the 100-150 pip range. I trade of 240min bars and have found that using a ATR(20) * 3 to determine stops has drastically increased my profits. Just my 2 cents though. Is this still cutting your losses short? Maybe, because I stick to my exit, but when I used to hear that phrase I always imagined it to mean that one must use a very small (short) stop loss.

HG
Cutting your losses short has nothing to do with how "tight" they are since an inappropriate stop can virtually guarantee a loss. The width of the stop depends on the setup used. To use exactly the same stop in every case is unlikely to achieve the desired result. A more productive exercise is to determine in advance just exactly what it is that the market has to do to prove you right and exactly what it is that the market has to do to prove you wrong. It is this exercise to which "cut your losses short" refers, plus, of course, the act of actually following through on the cutting.
 

halldorpb

Junior member
17 0
All my trading systems backtesting indicates that the most effective stop for the long term is at a mighty 30-100% drop from a high; 100% (buy and hold) really works out great, unless you buy Enron of course. In my opinion, those who use very close stops are simply playing themselves more risk averse than those that use very wide or no stops, and this is reflected in their generally smoother and stabler equity curves, but less profit potential.

The key to real performance seems to be market selection, market selection, market selection - and a simple risk management method that flexibly accommodates the market.
 

SOCRATES

Veteren member
4,966 134
This article is well written in a way that has something in it for everyone. May I point out that it is very fashionable to muddle what is a System and a Method.

A System is the way that something works, whereas a Method is a means of using a system in order to achieve an objective, and a Strategy is a planned method of achieving an objective.

It follows that a Superior Strategy is a better way of achieving an objective, whereas a Supreme Stragegy is the very best strategy that can be utilised in order to achieve a selected objective.

SOCRATES.
 
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Windlesham1

Well-known member
424 24
I'm happy to mentor any novices,after 2 years full time options and futures trading. What burns my a**e is that I let my broker trade some funds for me,incurring a 17% loss.For my own account in the last 12 months I'm up 30%,double my first year's profits.
 

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