Very interesting description of how traders evolve over time. The pieces of advice Bo Yoder andVadym Graifer give at the end of the article are spot on. Definitely worth reading as every trader worth his salt can relate to all the different stages. Enjoy.
Stages of a Trader
Stage One: The Mystification Stage (by Bo Yoder)
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.
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 stop-loss.
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. (more…)
Trading is ALL about managing risk and probability. The risk part is easy, you can quantify your risk by setting a stop on all your trades. Yes, a stock can gap through your stop overnight, so we can’t know are risk 100% for certain, but setting aside major overnight announcements and earnings, we can get a pretty good idea. The probability part is a little more difficult. I don’t have empirical evidence to support the patterns I trade on both the long and shorts side, other’s have done a decent amount of research, and I have read some, but at the end of the day I have always believed that so called voodoo of technical analysis is a different religion for everyone. Technical analysis, being little more than the study of the psychology of the market, is interpreted by everyone differently, and therefore should not be seen quantitatively to a large extent, but as more of an art. It’s just like a psychologist, you can go to 4 different guys and get 4 different answer to your issues, they will approach you in different ways, ask you different questions, it’s a feel thing.