Psychology Getting Started 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.
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trendie said:

I had the same problem re: tight stops.
I have now found that using a stop to trigger an "alert" is better.
Take for example, simplistically, SMAs. I have found the FIRST hit of the MA by a trailing stop should be seen as a WARNING to monitor the trade, and ready oneself for an exit at a better price.

Have you tried using a stop as a warning to get out rather than a hard and fast rule ?
( by all means use FAR hard-stops )
You may find that you get out at better prices.
( Note: Alan Farley ( Master Swing Trader ) discusses spikes. ))

merely a thought.

I used them when I was intraday trading but I prefer longer term now and have stopped the chart service I had. I am trading better without stops than with them. My opinion is that stops work very well to the financial advantage of the moneymakers.

Will have a look at Farley, thanks.

Split, you are correct in what you say that stops work very well to the financial advantage of the moneymakers.

The object of the excercise is to backwards engineer the financial advantage to fhe money makers, back to the minimisation of risk to the risk takers.

Invairalbly the correct management of stops is a delicate matter because there are two main considerations.

The first is the choice of a defendable entry point. This means that when going long in a rising market you should enter at a time and price level at which your entry makes you a strong holder and not a weak holder.

Depending upon your entry point you can then clearly assess where the stop should be placed.

Furthermore these two considerations depend upon timing.

The same applies when going short in a falling market.
Depending upon your entry point you can then clearly assess where the stop should be placed.

Furthermore these two considerations depend upon timing.

The same applies when going short in a falling market.

So you work out your stops first, then the entry point depends on the amount of risk that you are prepared to take? The problem is to figure out where the rest of us traders are going to put the stops and place yours below them, isn't it? Your comment on entering with a strong position is interesting. Frankly, I have been messing about all the week with a share that has done practically nothing, so my timing was all to hell on that one.

The whole outcome revolves around timing. You c an be right about a particular direction, but go in too early or too late. Then the use of time is very important. The choice of entry point is very important because you do not want to be fundamentally right, but not succeed. The stop has to be calculated in advance, and it must be as tight as possible, irrespective of what others may be doing. They are not in control of what you are doing, you are. If your timing is correct and your view of the direction is correct and your entry point is correctly chosen it is most unlikely that your stop will be hit. This is because the outcome you expect is the one you get, immediately.
Enjoyed this artcle a lot, however this line troubled me:

"There is no point having a trading strategy if we can’t trade and no novice trader knows how to trade."

It's probably not the way it was supposed to be taken but it does sound a bit like he's saying a novice shouldn't have any kind of strategy until he he is no longer a novice. Surely a novice must have some some kind of strategy before trading.

I can, however, see the point of the article and thought it was a good read.

My reference to the article would be to Page: 2
In summary:
Don't waste money on systems, they have very little value in themselves.

Get help
a novice trader could seek out a mentor

part then brings us to another question: will successful traders give advice?

In the learning process if the student is unlucky to go to the wrong teacher or mix with the wrong students who tell the wrong things, I wonder how long he will take to learn the right thing? If the novice trader learns from one who doesn't really know how to trade, assuming the novice trader doesn't go bankrupt before learning the skill to make consistent profits, it may take a long time to learn the skill. But, will successful traders give advice? If he lives in a competitive world where there cannot be 2 double firsts in the same mountain, what then?
What one needs is a simple system backtested on a period where the market has been quite volatile with a lot of ups and downs. One would be surprised to know that a system as simple as a Moving Average Cross over can make you money on a consistent basis. This is the small insignificant part. The most important part is discipline and money management. Easier said than done but if you have a simple system thouroughly backtested aong with a trading plan laced with money management rules you can and will be a very successful trader in the long run on a consistent basis.