Stages of Traders
Stage One: The Clueless Trader
1) Heard of a day trader making millions, or buying options is safe and can make you rich quickly
2) Got lucky in an earlier stock investment.
3) After all, how hard can it be? The money sounds appealing and the freedom to be independent sounds attractive
4) Every trader is optimistic
5) You open a direct access brokerage account and the sound of Level II, ask/bid, and market makers make trading sound like hi-tech video game
6) You will buy just to see the market reverse and you will short just as the market starts to rally.
7) Most of your trades are done emotionally. You buy just because the markets feel strong without any logical reason
8) You have no clue how the mechanics and psychology of trading works. What’s worse? You are not aware that you don’t know
9) Most traders will blow their entire account at this stage.
10) Mostly you start your trading in a bull market
11) You will spend more time finding a broker charging least brokerage, how to save tax, and like companies paying dividend and issuing splits and bonuses and less time in learning what trading actually is.
12) A big majority of people will leave trading and blame the randomness of markets, or say markets are always manipulated
13) Generally you start with fundamental analysis and put money in “good” companies and don’t forget to watch CNBC
14) You don’t know what is short selling or have never tried it, no idea of stop loss as well
15) You are in the unconscious incompetence stage, in this stage your capital is at maximum risk
Stage Two: The Rookie Trader
1) In this stage you have lost enough money to realize what you are doing is completely wrong. In other words, you start to realize that you don’t know.
2) You will then devour every trading book available.
3) Your search for magic indicator and the holy grail starts here
4) You will memorize every technical pattern known to man. You will read about the ADX, moving averages, Fibonacci lines, pivot points, MACD, Bollinger Bands, channels, etc
5) You will go through the “help” tab on your data vendor to read about every single technical indicator available
6) You will plot them on your charts and spend hours looking for an indicator that works
7) You will be extra confident now, thinking you have found the magical technical indicator
8) Yet, you still continue to lose money everyday. You realize that your indicators are lagging and that every other new trader is probably looking at the same thing.
9) You realize that you are the sucker
10) You are in the conscious incompetence stage
Stage Three: The Developing Trader
1) You start to realize the amount of work required and the immense learning curve that you must overcome to understand the markets, maximum pessimism is experienced here
2) At this point, traders may find it overwhelming and quit. Stronger minded traders will push their motivation harder to start their second spurt for knowledge
3) Hunger and passion is needed to clear this stage
4) You will ask a thousand questions and bug every professional trader you meet. You will read a thousand day trading articles
5) You will start paper trading, develop strategies and setups, and define risk parameters for every trade
6) You will go on a hunt for self-understanding to master your psychological game
7) You will visualize every possibility on a trade before you take it.
8) This is the true learning phase. You are trying hard to develop your edge in trading.
Stage Four: The Determined Trader
1) This is the stage in which you learn to specialize in certain markets and trading methods.
2) Without realizing it, you have finally found your style of trading after hours of hard work and research. You stick to your method and you improve it
3) You realize that you need an edge whether its tape reading or being a Fibonacci expert. The important thing is you are slowly transforming yourself into a specialized trader
4) You test your methods and they seem to work. You gain tremendous market knowledge.
5) You reflect back on yourself and you can’t help but laugh at your foolishness.
6) Although you have not made enough money to call yourself successful you are proud of your journey and accomplishments
7) You realize that the Holy Grail is not about technical indicators or price patterns
8) You calculate risk before profits and place strict money management on all your trades.
9) You cut losses short and learn to scale out on your winners.
10) You start accept losing as a natural part of the game
11) You take high probability trades that you have tested and feel confident about your setups because you understand that trading is a game of probabilities
12) Your psychological makeup has changed from an amateur mindset to a professional one.
Stage Five: The Consistent Trader
1) You rely on your trading method and start taking trades systematically. You try to aim for consistency and are meeting your daily goals often.
2) You are fully aware of your strengths and weaknesses as a trader.
3) At times you feel euphoric and at times you feel pain. But you are able to understand your own psychological makeup to control your emotional swings.
4) You are now able to trade for a living
5) You have reached the conscious competence stage
Stage Six: The Expert Trader
1) In this final stage, you completely understand the markets you are trading. Being involved in it everyday you are aware of every key price level
2) You understand market concept and are able to predict the direction of the markets a fairly good amount of time.
3) You pat yourself on your back and take profits as soon as you feel euphoric. You do this because you understand euphoria is the same as emotional trading.
4) You talk to other traders and realize the development stage they are in
5) People start asking you for trading advice, you publish a book, and you have a specific trading methodology that represents you!
6) Taking trades come naturally and you are able to get in and out at the precise price levels based on tape
7) Instead of having the markets take your stop out, you exit when you know you are wrong.
8) You keep your head high but remain humble on the inside. You have now officially graduated the school of the hard knocks
9) You have reached the unconscious competence stage.
The issue we have is that our society naturally rewards those who do well. High School students with the best marks become eligible for the better university degrees. A better university degree enables better job prospects and potentially a higher income in the workforce and therefore potential for a higher standard of living. Unfortunately when it comes to the markets the same is not always true. In fact pursuing that same logic in the market can cause severe frustration and disappointment. A trader / investor who makes ten trades and gets eight correct can mathematically still lose.
An edge is the outcome, the mathematical outcome, of the buying and selling process. All successful traders / investors create a positive edge.
There are three factors to consider when determining if your edge will be a success:
- How much you win when you win
- How much you lose when you lose
- How often you win
We can combine 1 and 2 and call the resultant number the win/loss ratio.
The larger that win/loss ratio grows, the higher your profitability will be and the less important the win rate becomes. Unfortunately the win rate is where most novices, and indeed many experienced market professionals, come unstuck. It is human nature to think that a high winning percentage of transactions equates to higher profits.
The Expectancy Curve shows an important yet consistent relationship between the winning percentage and the win/loss ratio; moreover it shows the point at which a strategy will move from a losing proposition to a profitable proposition. It must be understood that these two statistics move in a converse manner: when one moves higher, the other moves lower. A trader wanting a higher percentage win rate will forego a high win/loss ratio.
Successful trading & investing comes down to how much you win when you win and how much you lose when you lose.