Bo Yoder And Vadym Graifer – 6 Stages Of A Trader
Very interesting description of how traders evolve over time. The pieces of advice Bo Yoder and Vadym 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.
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.
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.
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.
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.
Stage Six: Mastery (also from Vadym 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.