Good day all, after looking at my portfolio and the action in the overall markets I thought that this would be a good time to discuss the longer-term focus of successful traders. There is a phenomenon that sometimes takes place when you make the transition from a sporadically profitable trader to a more consistently profitable trader and since this blog is named for the rookies I think this is a good thing to mention to perhaps save some pain down the road for everyone when you make the transition as well.
This discussion comes to you from personal experience and the wisdom of many others that came before I did. Let’s go over the evolution of a trader step by step and see if we can’t explore the phenomenon and see if we can prevent it from causing you an issue in your trading.
Step 1: Introduction to trading. In this stage, people are introduced to the world of trading in a couple of different ways. Perhaps you were sold on a can’t miss system where you will make nothing but money or perhaps you know someone who trades and has said this is something worth looking at. At this point, you are diving into a pool in which you may not have any idea of how deep it is.
Step 2: Trial by fire. In this stage, maybe you are starting to put some money into the markets and only one of two things can happen, either you do very well and start raking in the cash, or two you get walloped and are thinking that this is crazy and that trading is some kind of voodoo. In this stage, the latter scenario is the best for most people because if you are successful from the jump then you may let hubris creep in and think that there is nothing to this game and that trading is easy money. This can be the death blow to many a budding trader. I have seen this happen a number of times where traders jump in and do well and then get crushed on one big trade because they really don’t understand the game and what is required to survive and thrive. The first scenario can be good if it spurs the trader to learn more about the game of trading, it can also be a spot where it weeds out those who will become traders and those who are just dabbling. It has a self -regulating kind of quality.
Step 3: This is where you really begin to become a trader, you realize that trading is more than just picking the right stock. It involves education, study, and practice to get in tune with the markets and how they work. With some dedication to your craft here is the spot where you will start to pick up some wins but might not really understand the entire process.
Step 4: In this stage you start to hone your craft and start to build up a process that fits who you are as a person. You may start to build a routine that will make it possible for you to get more consistent results. This will be the stage where more study and extensive practice will be required to move onto the final stage.
Step 5: This is the stage where consistency is possible. This is where you will comfortable with your process and your equity curve should start to move up on a decent angle over time. You will still see ups and downs in your net liquidation but there should be a slow uptick in your equity curve. This is where the problem can creep in.
The problem is that if one is not careful when reaching stage 5 that one can get too comfortable and complacent and that can push one back to stage 4. This problem manifests itself in the amount of risk one is taking and if that risk is not controlled then disaster can strike. Let me paint a scenario where this can happen. Let’s say you feel like you have perfected a certain strategy and you have been having great success with that strategy and you decide to up the ante and increase the number of contracts you use and then you hit a losing skid and that equity curve you coveted in stage 5 can be decimated.
So to make sure the long climb to success is worth it one must remember that even moving from sporadically profitable to consistently profitable requires a laser like focus to remain consistently profitable.
Coach “Old Money” Holmes