Five Levels of Becoming a Good Trader

[Flojomojo 10]

I know this is somewhat like http://www.traderslaboratory.com/forums/f43/a-new-traders-journey-to-success-156.html , but I found this post http://forums.babypips.com/newbie-island/2243-five-levels.html about a year ago. I have it on my wall and read through it every time I get a bit frustrated! Hope it does the job for you too!

 

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The Five Levels of a Trader

 

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 because 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 may have initial success, and that’s even worse - coz it tells your brain that this really is simple and you start to risk more money.

 

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 You are totally oblivious to your incompetence at trading.

 

This step can last for a week or two of trading but the market is usually swift and you move into the next stage.

 

 

Step Two - Conscious Incompetence

 

Step two is where you realize that there is more work involved in trading and that you might actually have to work a few things out. You consciously realize that you are an incompetent trader - you don't have the skills or the insight to turn a regular profit.

 

You now set about buying systems and e-books galore, read websites based everywhere from USA to the Ukraine. and begin your search for the holy grail. During this time you will be a system nomad - 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 come 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 Metatrader, 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 because 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 because 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 overtrade 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 won’t work so you try paying for signals from someone else - they don't work for you either.

 

You might even approach a 'guru' like Rob Booker or someone on a chat board who promises to make you into a trader(usually for a fee of course). Whether the guru is good or not you wont win because there is no replacement for screen time and you still think you know best.

 

This step can last ages and ages - in fact in reality talking with other traders as well as personal experience confirms that it can easily last well over a year and more nearer 3 years. This is also the step when you are most likely to give up through sheer frustration.

 

Around 60% of new traders die out in the first 3 months - they give up and this is good - think about it - if trading was easy we would all be millionaires. another 20% keep going for a year and then in desperation take risks guaranteed to blow their account which of course it does.

 

What may surprise you is that of the remaining 20% all of them will last around 3 years - and they will think they are safe in the water - but even at 3 years only a further 5-10% will continue and go on to actually make money consistently.

 

By the way - they are real figures, not just some I’ve picked out of my head - so when you get to 3 years in the game don’t think its plain sailing from there.

 

I've had many people argue with me about these timescales - funny enough none of them have been trading for more that 3 years - if you think you know better then ask on a board for someone who's been trading 5 years and ask them how long it takes to become fully 100% proficient. Sure i guess there will be exceptions to the rule - but I haven’t met any yet.

 

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 but now its in your blood

 

One day – I’m a split second moment you will enter stage 3.

 

 

Step 3 - The Eureka Moment

 

Towards the end of stage two you begin to realize that it's not the system that is making the difference. You realize 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 and finally comes the eureka moment.

 

The eureka moment causes a new connection to be made in your brain. You suddenly realize 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.

 

Because of this revelation you stop taking any notice of what anyone thinks - what this news item will do, and what that event will do to the markets. You become an individual with your own method of trading

 

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 isn't your fault - as soon as you realize that the trade is bad you close it . The next trade or the one after it or the one after that will have higher odds of success because you know your system works.

 

You stop looking at trading results from a trade-to-trade perspective and start to look at weekly figures knowing that one bad trade does not a poor system make.

 

You have realized 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 as you know the probabilities stack in your favor.

 

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.

 

 

Step 4 - Conscious Competence

 

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 looses 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

 

 

Step Five - Unconscious Competence

 

Now we’re 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 200 pips in a day doesn’t make you any more excited that getting 1 pips.

 

You see the newbies in the forum shouting 'go dollar go' as if they are urging on a horse to win in the grand national and you see yourself - but many years ago now.

 

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 recognize yourself in their questions from about two years ago. You pass on your advice but you know most of it is futile because 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.

 

Finally you grow out of the chat rooms and find a few choice people who you converse with about the markets without being influenced at all.

 

All the time you are honing your methods to extract the maximum profit from the market without increasing risk. Your method of trading doesn’t change - it just gets better - you now have what women call 'intuition'

 

You can now say with your head held high "I'm a currency trader" but to be honest you don’t even bother telling anyone - it's a job like any other.

 

 

 

I hope you’ve enjoyed reading this journey into a traders mind and that hopefully you’ve identified with some points in here.

 

Remember that only 5% will actually make it - but the reason for that isn’t ability, its staying power and the ability to change your perceptions and paradigms as new information comes available.

 

The losers are those who wanted to 'get rich quick' but approached the market and within 6 months put on a pair of blinkers so they couldn’t see the obvious - a kind of "this is the way i see it and that’s that" scenario - refusing to assimilate new information that changes that perception.

 

I’m happy to tell you that the reason I started trading was because of the 'get rich quick' mindset. Just that now I see it as 'get rich slow'

 

If you’re thinking about giving up I have one piece of advice for you ....

 

Ask yourself the question "how many years would you go to college if you knew for a fact that there was a million dollars a year job at the end of it?

 

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Have a nice journey and hopefully we will meet at the end,

Flojomojo

[method 10]

Excellent thread.

 

I started trading several months ago and I believe I am in stage 2....which means there is much to go yet. But now thanks to you I'm looking forward to it more than ever...

[Blu Bull 10]

I'm at stage 2 right right now as well

[Nvesta81 10]

 

The losers are those who wanted to 'get rich quick' but approached the market and within 6 months put on a pair of blinkers so they couldn’t see the obvious - a kind of "this is the way i see it and that’s that" scenario - refusing to assimilate new information that changes that perception.

 

I’m happy to tell you that the reason I started trading was because of the 'get rich quick' mindset. Just that now I see it as 'get rich slow'

 

If you’re thinking about giving up I have one piece of advice for you ....

 

Ask yourself the question "how many years would you go to college if you knew for a fact that there was a million dollars a year job at the end of it?

 

Flojomojo

 

I don't want to be "that guy" that sh**s on everyone's parade, but I will be anyway. If success in day trading is only acquired very slowly yet almost everyone who's drawn to the profession wants fast money then it begs the question of "why bleeping bother?"

 

If it's going to take 5 years of watching your equity stay flat or fluctuate above and below your starting point, and then another 5 years before you can make any consistent gains at all ,then you're wasting a lot of time and money on something that's highly risky and painstakingly tough to do while trying to make a living. A million dollar a year job? I'd say that's unlikely given that the way you've just described trading makes it sound like a hit-and-miss operation. A person would be better invested getting a high paying job with benefits and pension plan while accumulate blue chip stock rather than gamble their life on a pipe dream in which the duration it will take to succeed may last as long as it would to get a nice retirement package. Just my 2 cents.

[Guest forsearch]

I don't want to be "that guy" that sh**s on everyone's parade, but I will be anyway. If success in day trading is only acquired very slowly yet almost everyone who's drawn to the profession wants fast money then it begs the question of "why bleeping bother?"

 

 

Because of the vast upside potential when you finally do get it. That's why. Many folks blow up accounts just trying to get there. Like John Carter of TTM who freely admits he blew out THREE trading accounts in succession until he finally made it. And this was before his TTM site took off, mind you.

[Flojomojo 10]

...If success in day trading is only acquired very slowly yet almost everyone who's drawn to the profession wants fast money then it begs the question of "why bleeping bother?"

...

A person would be better invested getting a high paying job with benefits and pension plan while accumulate blue chip stock rather than gamble their life on a pipe dream in which the duration it will take to succeed may last as long as it would to get a nice retirement package. Just my 2 cents.

 

I don't think that the primary motive has to be "to become rich". By now I actually think this motive will make you broke the quickest! Its not necessarily about the money...if you make it this will take care of itself. Many people do ok, but not great, in the markets. Why do they bother to continue their journey? Why not just get the "high paying job with the pension plan"? Its the motive that counts! If your high paid job does not fulfill you and you find joy in trying to master the markets...would you give it a shot or not? The answer will be different for every person...I guess you already have found your answer

There's a book called "Market Rap - The odyssey of a still struggling commodity trader" (http://www.amazon.com/Market-Rap-Odyssey-Still-Struggling-Commodity/dp/0934380619/ref=sr_1_2?ie=UTF8&s=books&qid=1217721002&sr=8-2) that tells the story of a Non Market Wizard and the how and why he got from selling cars to trading. He fairly gets along, but he certainly doesn't seem to regret his decision. If you already know that there's potential regret in the decision you make for your life...don't even venture on that path!

 

I have studied physics and can get almost any job I want. I'm interested in the markets due to my urge to deeply understand how things work and mainly because I don't like to work for other people! I enjoy the challenge of being completely responsible for my own results...and the markets are very very very demanding judges that feed on my bad personal attributes! I have chosen this path and I'm willing to pay for what it takes. I know that the journey will be pretty/very rough, but I've never been the "giving up" type of person...

Edited August 3, 2008 by Flojomojo

[Nvesta81 10]

Fair enough. If a person is fortunate enough to carry on and still pay for everything they need to live, more power to them!

 

I for one have been reading and posting on a few day trading forums for awhile and I see a lot of optimism and hope among traders and I use to share that hope, but lately I'm starting to question a lot of these claims I see from traders. I thought I'd bring a little bit of skepticism to the table, or at least the perspective from a trader who has not yet seen the light at the end of the tunnel. I am currently that trader. I've been at this for over a year now. I have countless hours of screen time under my belt. I have programmed many different 'systems' and back-tested them to the last tick. My conclusion so far is that the market is very hard to conquer, if not impossible. Maybe I'm just burnt out, or desperate for a solution, but I see no light at the end of the tunnel.... and it sucks to be there. Discretionary trading just seems more like luck than anything to me... but if some traders out there actually have that magical 'intuition' that allows them to ride waves of money consistently time and time again, I applaud you, but I really don't think it can last... maybe I say that only because I can't do it...and honestly, I really hope that some of you can, because that means I might some day be able to as well.

 

Right now I just can't wrap my head around it that people actually make a living doing this year after year without hitting any walls, unless they are wealthy to begin with.

[ztrader 10]

.... I see a lot of optimism and hope among traders and I use to share that hope, but lately I'm starting to question a lot of these claims I see from traders. I thought I'd bring a little bit of skepticism to the table, or at least the perspective from a trader who has not yet seen the light at the end of the tunnel.

 

I empathize with your skepticism by just looking at the stats indicating that 90-95% of traders are either struggling or have completely failed. Yet, on the other hand you see and read all these optimism in most boards and from among the many emails you may have received from some commercial system vendors. Optimism is most welcome, of course, and there are those of us who make very comfortable living in trading business. At the time being, you may just happened to be travelling in the wrong or "not so suitable" tunnel.

 

 

I am currently that trader. I've been at this for over a year now. I have countless hours of screen time under my belt. I have programmed many different 'systems' and back-tested them to the last tick. My conclusion so far is that the market is very hard to conquer, if not impossible. Maybe I'm just burnt out, or desperate for a solution, but I see no light at the end of the tunnel.... and it sucks to be there. Discretionary trading just seems more like luck than anything to me... but if some traders out there actually have that magical 'intuition' that allows them to ride waves of money consistently time and time again, I applaud you, but I really don't think it can last... maybe I say that only because I can't do it...and honestly, I really hope that some of you can, because that means I might some day be able to as well.

You have also read, told, and heard about and, in fact as you stated you have done and spent, countless hours of screen time but what was on the screen, the kind of information and technical overload one may have been visualizing and transmitting to their brain during all those times. What filtering process do you apply with what you screen in and screen out? You have programmed many systems and back tested them successfully yet when you have launched it on live real time data you may have encountered many disappointments as in most cases it did not give you the similar results.

 

You did exactly what most traders have read and said to do, "screen time and back testing" technical analysis, market internals, etc., and still no light. You're right, the market is very challenging and hard to conquer yet you can tame it with PDF = patience, discipline, focus. Don't give up on HOPE and OPTIMISM yet. You have done a lot and have plenty knowledge behind you. Maybe, this is just about the RIGHT time to redirect your time, energy, and money and start looking quickly for an exit on the side of and out of that "dark" tunnel you now travel; look for a shorter tunnel where you can see the light within a short distance and period time, reducing you new learning curve with a new trail in your trading adventure. It will not be easy but it sure can be simple.

 

ENJOY!

 

ztrader

Edited August 3, 2008 by ztrader

[ochie 10]

I don’t know if this will help or not but maybe you just need to back up. Maybe start with a simple system/strategy that can produce a positive result with a limited (and strict) rule set. Now, with some strict MM rules sim trade the rules exactly. Practice the execution of those rules over and over exactly. There’s no room for intuition at this point. This should quickly give you usable information that’s easy to separate between strategy and the execution of the strategy. And, maybe a different way to approach your efforts.

[Jaronimo 10]

My conclusion so far is that the market is very hard to conquer, if not impossible. Maybe I'm just burnt out, or desperate for a solution, but I see no light at the end of the tunnel.... and it sucks to be there. Discretionary trading just seems more like luck than anything to me... but if some traders out there actually have that magical 'intuition' that allows them to ride waves of money consistently time and time again, I applaud you, but I really don't think it can last... maybe I say that only because I can't do it...and honestly, I really hope that some of you can, because that means I might some day be able to as well.

 

Right now I just can't wrap my head around it that people actually make a living doing this year after year without hitting any walls, unless they are wealthy to begin with.

 

 

The market is impossible to conquer. My opinion is that if you try to conquer it you will fail. I don't try to conquer it, I try to jump on for the ride. Much easier to do. You don't conquer a mountain, you look for the easy path and walk to the top.

 

As far as intuition goes, I am not sure I agree with that word. For me its more like perception. Hard to explain but you know it when it happens. Its like driving a car, without consciously looking and thinking I usually always know when the driver in the next car, out of my line of sight is swerving into my lane. How? I don't know. I think after so many hours of "wheel time" I perceive things that are going on. Maybe I see them unconsciously? Or hear them, or feel them? I don't know how, I just know.

 

A good example is kids, for those parents out there. They can be playing in the other room, but you can unconsciously perceive when they did something wrong. Even when you are not paying attention. I can't explain whats different, but my mind can perceive the change.

 

Ever meet someone for the first time and instantly think "theres something wrong with this guy"??? Only to be proven right later? How did your mind perceive that so fast with so little information? Or should I say, so little information that you were aware of consciously?

 

The markets are similar. I can't always explain what is happening, but that does not stop me from making money off of the situation. Its very subtle, but you just take the trade. If it works, great, if not you close it out and wait for the next one.

 

If you are at the point of being frustrated and feel its impossible, you need to step away from it for a while. I walk away from things when I get frustrated and usually later the answer comes to me. Thats how my mind works, the harder I try to figure something out the harder it gets for me to figure it out. But if I walk away, the answer usually seems to find me later.

[Sledge 13]

*snip* or at least the perspective from a trader who has not yet seen the light at the end of the tunnel. I am currently that trader. I've been at this for over a year now. I have countless hours of screen time under my belt. I have programmed many different 'systems' and back-tested them to the last tick. My conclusion so far is that the market is very hard to conquer, if not impossible. Maybe I'm just burnt out, or desperate for a solution, but I see no light at the end of the tunnel.... and it sucks to be there. Discretionary trading just seems more like luck than anything to me... but if some traders out there actually have that magical 'intuition' that allows them to ride waves of money consistently time and time again, I applaud you, but I really don't think it can last... maybe I say that only because I can't do it...and honestly, I really hope that some of you can, because that means I might some day be able to as well.

 

YOU ARE ALMOST THERE! I know it may sound like I'm out of my mind- but I'll say it again- YOU ARE ALMOST THERE! This is most likely the last test of your wills. The market is testing your sanity, it is testing your gumption, it is testing your perseverence.

 

I have been in your shoes, I have lived it, I read this post and I feel for you because I know what it is like. You have dreams of what this can do for you and your life, your family. You KNOW their is a way to succeed, you just can't quite put your finger on it. It is like looking through a dirty window- you can see the outside world and its beauty- but if only the dirty haze was removed- you'd see the market full and whole, you would see the whole picture. Sound familiar?

 

I had this happen in 2 stages my friend. I broke through the first one and thought "The Veil has been lifted" I think I've got it. Reality: I got a NICE chunk of clarity- but the window was still a bit dirty. So I entered Stage 2 of this- armed with my new found clarity and knowing that their is still something missing. I fought it, I tried to figure it out. I then had my ultimate "A-HA!!!!!!!!!!!!" Moment- everything I had learned, everything that was crap was filtered out- without me even thinking about it. All the pieces of the puzzle THAT MATTERED came together all at once.

 

I know you don't believe me- but fight this. Fight it with every fiber of your being- you are very very close to breaking through!

Aaron

[Sledge 13]

PDF = patience, discipline, focus.

 

Ztrader-

I love this- This could be wall plaqued and hung in my trading office for sure!

Aaron

[sreeja 10]

The five steps are very useful.The description about Conscious Incompetence is very useful.I am a new comer to field trading.

[Sledge 13]

Sreeja-

Similar but a bit better register in my brain was Bo Yoders Take on the same subject. Maybe you can find a few nuggets in it to help you along as well:

 

Stages of a Trader (from Bo Yoder)

 

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Stage One: The Mystification Stage

 

This is where the neophyte trader begins. He has little or no understanding of market structure. He has no concept of the interrelationship among markets, much less between markets and the economy. Price charts are a meaningless mish-mash of colored lines and squiggles that look more like a painting from the MOMA than anything that contains information. Anyone who can make even a guess about price direction based on this tangle must be using black magic, or voodoo.

 

However, as one begins to observe, read, study, the mess may begin to resolve itself into something that may make sense. Sort of.

[Sledge 13]

Stage Two: The Hot Pot Stage

 

You scan the markets every day. After a while (sometimes a good long while), you notice a particular phenomenon which pops up regularly and seems to "work" pretty well. You focus on this pattern. You begin to find more and more instances of it and all of them work! Your confidence in the pattern grows and you decide to take it the very next time it appears. You take it, and almost immediately your stop is hit, and you're underwater for the total amount of your stoploss.

 

So you back off and study this pattern further. And the very next time it appears, it works. And again. And yet again. So you decide to try again. And you take the full hit on your stoploss.

 

Practically everyone goes through this, but few understand that this is all part of the win-lose cycle. They do not yet understand that loss is an inevitable part of any system/strategy/method/whathaveyou, that is, there is no such thing as a 100% win approach. When they gauge the success of a particular pattern or setup, they get caught up in the win cycle. They don't wait for the "lose" cycle to see how long it lasts or what the win/lose pattern is. Instead, they keep touching the pot and getting burned, never understanding that it's not the pot (pattern/setup) that's the problem, but a failure on their part to understand that it's the heat from the stove (the market) that they're paying no attention to whatsoever. So instead of trying to understand the nature of thermal transfer (the market), they avoid the pot (the pattern), moving on to another pattern/setup without bothering to find out whether or not the stove is on.

[Sledge 13]

Stage Three: The Cynical Skepticism Stage

 

You've studied so hard and put so much effort into your trading and this universal failure in the patterns only when you take them causes you to feel betrayed by the market, the books and materials and gurus you tried to learn from. Everybody claims their ideas lead to profitability, but every time you take a trade, it's a loser, even though the setups all worked perfectly before you played them. And since one of the most painful experiences is to fail when success looks easy, this embarrassment is transformed into anger: anger at the gurus, anger at the vendors, anger at the writers, the seminars, the courses, the brokers, the market makers, the specialists, the "manipulators". What's the point in trying to analyze and improve your own trading when there are so many dark forces out to get you?

 

This excuse-driven blame game is a dead-end viewpoint, and explains a lot of what you find on message boards. Those who can't pull themselves out of it will quit.

[Sledge 13]

Stage Four: The Squiggle Trader Stage

 

If you don't quit, you'll move into the "squiggle trader" phase. Since you failed with patterns and so on, you figure there's some "secret weapon", a "holy grail" that's known to the select few, something that will help you filter out all those bad trades. Once you find this magical key, your profits will explode and you'll achieve every dream you ever had.

 

You begin an obsessive study of every method and every indicator that is new to you. You buy every book, attend every course, sign up for every newsletter and advisory service, register for every trading website and every chat room. You buy more elaborate software. You buy off-the-shelf systems. You spend whatever it takes to buy success.

 

Unfortunately, you stack so much onto your charts that you become paralyzed. With so many inputs, you can't make a decision, particularly since they rarely agree. So you focus on those which agree with the direction of the trade you've taken (or, if you're the fearful sort, you look only for those which will prove to you how much of a loser you think you are).

 

This is all characteristic of scared money. Without a genuine acceptance of the fact of loss and of the risks involved in trading, you flit around like a butterfly in search of anything or anybody who will tell you that you know what you're doing. This serves two purposes: (1) it transfers to others the responsibility for the trade and (2) it shakes you out of trades as your indicators begin to conflict. The MACD says buy, the sto says sell. The ADX says the market is trending, the OBV says it's overbought. By the end of the day, your brain is jelly.

 

This process can be useful if the trader learns from it what is popular, i.e., what other traders are doing, and, if he lasts, how to trade traps and panic/euphoria. And even though he may decide that much of it is crap, he will, if he doesn't slip back into the Cynical Skepticism Stage, have a more profound appreciation -- achieved through personal experience -- of what is sensible and logical and what is nonsense. He might also learn something more about the kind of trader he is, what "style" suits him best, learn to distinguish between what is desirable and what is practical.

 

But the vast majority of traders never leave this stage. They spend their "careers" searching for the answer, and even though they may eventually achieve piddling profits (if they don't, they will of course eventually no longer be trading), they never become truly successful, and this has its own insidious consequences.

[Sledge 13]

Stage Five: The Inwardly-Bound Stage

 

The trader who is able to pry himself out of Stage Four uses his experiences there productively. The trader learns, as stated earlier, what styles, techniques, tactics are popular. But instead of focusing entirely on what's "out there", he begins to ask himself some questions:

 

What exactly does he want? What is he trying to accomplish?

 

What sort of trading makes the most sense to him? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? Which is most comfortable?

 

What instrument -- futures, stocks, ETFs, bonds, options -- provides the range and volatility he requires but is not outside his risk tolerance? Did he learn anything at all about indicators in Stage Four that he might be able to use?

 

And so he "auditions" all of this in order to determine what suits him, taking all that he has learned so far and experimenting with it.

 

He begins to incorporate the "scientific method" into his efforts in order to develop a trading plan, including risk management and trade management. He learns the value of curiosity, of detached interest, of persistence and perseverance, of taking bits and pieces from here and there in order to fashion a trading plan and strategy that are uniquely his, one in which he has complete confidence because he has tested it thoroughly and knows from his own experience that it is consistently profitable.

 

He accepts fully the responsibility for his trades, including the losses, which is to say that he understands that losses are inevitable and unavoidable. Rather than be thrown by them, he accepts them for what they are, a part of the natural course of business. He examines them, of course, in order to determine whether or not some error was made, particularly one that can be corrected, though true trading errors are rare. But, if not, he simply shrugs off the loss and goes on about his business. He understands, after all, that he is in control of his risk in the market.

 

He doesn't rant about his broker or the specialist or the market maker or that vast conspiracy of everyone who's trying to cheat him out of his money. He doesn't attempt revenge against the market. He doesn't fret. He doesn't fume. He doesn't succumb to hope, fear, greed. Impulsive, emotional trades are gone. Instead, he just trades.

[Sledge 13]

Stage Six: Mastery (also from Vad Graifer)

 

At this level, the trader achieves an almost Zen-like trading state. Planning, analysis, research are the focus of his time and his effort. When the trading day opens, he's ready for it. He's calm, he's relaxed, he's centered.

 

Trading becomes effortless. He is thoroughly familiar with his plan. He knows exactly what he will do in any given situation, even if the doing means exiting immediately upon a completely unexpected development. He understands the inevitability of loss and accepts it as a natural part of the business of trading. No one can hurt him because he's protected by his rules and his discipline.

 

He is sensitive to and in tune with the ebb and flow of market behavior and the natural actions and reactions to it that his research has taught him will optimize his edge*. He is "available". He doesn't have to know what the market will do next because he knows how he will react to anything the market does and is confident in his ability to react correctly.

 

He understands and practices "active inaction", knowing exactly what it is he wants, exactly what it is he's looking for, and waiting, patiently, for exactly the right opportunity. If and when that opportunity presents itself, he acts decisively and without hesitation, then waits, patiently, again, for the next opportunity.

 

He does not convince himself that he is right. He watches price movement and draws his conclusions. When market behavior changes, so do his tactics. He acknowledges that market movement is the ultimate truth. He doesn't try to outsmart or outguess it.

 

He is, in a sense, outside himself, acting as his own coach, asking himself questions and explaining to himself without rationalization what he's waiting for, what he's doing, reminding himself of this or that, keeping himself centered and focused, taking distractions in stride. He doesn't get overexcited about winning trades; he doesn't get depressed about losing trades. He accepts that price does what it does and the market is what it is. His performance has nothing to do with his self-worth.

 

It is during this stage that the "intuitive" sense begins to manifest itself. As infrequent as it may be, he learns to experiment with it and to build trust in it.

 

And at the end of the day, he reviews his work, makes whatever adjustments are necessary, if any, and begins his preparation for the following day, satisfied with himself for having traded well.

 

The knowledge proved through research that a particular price pattern or market behavior offers an acceptable level of predictability and risk to reward to provide a consistently profitable outcome over time.