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When it comes to trading, I don't fully trust everything I hear or read. You can't. For example, I love to re-read Jack Schwager's "Market Wizards" books, but it is still useful to take everything with a grain of salt. First, there's a natural tendency to present oneself in the best light during any type of interview a person gives, whether it is informally chatting around the water cooler or recounting one's exploits for a book. Second, times change. What may have been true in the 1980s may not be true in 2007. Third, what may be true for one trader may not be true for another trader. Each person has his or her unique abilities and his or her own financial and psychological resources.
Market conditions rarely remain the same, and thus, you need to change your method to keep up with changes in the markets. Some trading methods are more valid than others are, or more popular. Ultimately, it is up to you to determine what works for you.
When I was in high school, the writer of the physics textbook we were using put in an entire chapter that was completely false and contrived. The point of the author's deception was to show students that scientists often learn theories that were thought to be valid but were later shown to have limitations. That was an important lesson to learn that I've carried with me into my professional life as a scientist. You may believe the validity of a theory for years only to discover later that it was completely wrong. This phenomenon is also found in the trading realm.
A conception of the market may be valid at one point in time and invalid during another point in time. Again, it is up to you to determine how to trade the markets, and which conception of the markets is valid and useful for you.
It would be nice if there were trading theories that worked like laws of nature. When an apple falls from a tree, we can calculate exactly when it will hit the ground. The theory was valid hundreds of years ago when it was discovered, and it will be valid forever. It would be nice if trading worked that way, but it does not. So what do you do? How can you learn to trade if you can't trust everything you read? Well, it isn't that bad. It is simply a matter of breaking the task down into stages and showing the appropriate level of skepticism at each stage.
I've found the framework presented by Dr. Brett Steenbarger in his book, "Enhancing Trader Performance," useful. When learning to trade the markets, traders go through three stages: Initiation, Development, and Mastery. In the initiation stage of development, a novice trader explores the new field of trading and enjoys the process of discovery. Trading is pursued mostly because it is fun. In addition, many traders, who end up pursuing a career in trading, usually experience early success, and they stick with trading because its fun and they're good at it. Most traders are not very skeptical at this stage. If they have experienced early success, they tend to underestimate the difficulty of trading the markets. And it is all right, as long as they manage risk and don't lose too much.
It's useful to let your guard down a little when you first start to trade. Try new things, but manage risk. The mistake I made when I first traded was that I was too skeptical. I heard from many seasoned traders about how they got burned by following so-called trading gurus that knew nothing about trading the markets. Although losing money with unreliable trading strategies is a reasonable threat, you've got to start someplace. I eventually decided that I had to read a few basic books about the markets and start trading. I explored different methods until I found what worked best for me. But mainly, I managed risk so that my exploration into the new field was safe.
At some point, trading becomes less fun and more work. The hard work of mastering the markets begins in the Development Stage. During this stage, a trader should work hard to develop specific trading skills and to develop a basic sense of competence. This is where a more serious commitment to the field begins. The trader in the development stage concentrates on learning different strategies and trying them out. A great deal of basic knowledge and skills is gathered, just as one would study any new profession. It is at this stage that a trader becomes the most skeptical. When you feel you need to make money in the markets, it becomes more difficult. You put pressure on yourself to succeed and start to learn that some trading methods work better than others. But it is still useful to explore new methods. It's the only way you can find what works best for you.
During the mastery stage, traders try to reach their full potential. Reaching one's highest possible level of performance is a primary motivator. At this stage, a trader may seek out the guidance of a teacher, mentor, or coach.
Trading consumes most of their time. Intense focus is the key. The trader at this stage has already developed the basic skills required to trade. Now it is just a matter of actually working diligently to achieve specific financial goals, such as a 20% return on one's trading account. By this point, traders know what works for them. They may be overly skeptical in that they mistrust new methods that are different from what they know works, but it's important not to get too set in your ways. Since market conditions are in constant flux, it's always useful to be on the lookout for new methods that may be valuable to you in the future.
At all stages of your development as a trader, it is useful to stay skeptical. When you first start trading, it's difficult to know where to start and who to listen to. But you have to start somewhere. It may require you to try out a few methods that may not be profitable at first. Eventually, you will find something that works and start building up confidence and trading skills. Until then, however, trading the markets is risky and it's wise to be a little skeptical and risk averse
By Michael Shopshire, PhD
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I believe you are probably the best out of the literal hundreds of traders that I have witnessed.
