Masterforex-V: The learning cycle for a newbie trader - PART 1 - Masterforex-V

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The learning cycle for a newbie trader - PART 1

#1 User is offline   NthInt 

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Post icon  Posted 01 November 2007 - 07:53

#1
Hi folks.
Many of you don't know, but I used to be involved in training people in various things (not trading) and I thought I might share with you the journey that you take when beginning anything new. also if I show you my kind of writing style you might just buy my beginners forex book
This cycle is as true for trading as it is for learning to drive a car and consists of five components.
I'm going to take you through each stage so you can recognise exactly where you are in your trading journey.
Step One: Unconscious Incompetence.
This is the first step you take when starting to look into trading. you know that its a good way of making money cos you've heard so many things about it and heard of so many millionaires.Unfortunately, just like when you first desire to drive a car you think it will be easy - after all, how hard can it be?? - price either moves up or down - what's the big secret to that then - lets get cracking!
unfortunately, just as when you first take your place in front of a steering wheel you find very quickly that you haven't got the first clue about what you're trying to do. you take lots of trades and lots of risks. when you enter a trade it turns against you so you reverse and it turns again .. and again, and again.
you try to turn around your losses by doubling up every time you trade - sometimes you'll get away with it but more often than not you will come away scathed and bruised
Well this is stage one - you are totally oblivious to your incompetence at trading.Stage one can last for a week or two of trading but the market is usually swift and you move onto stage two.
Stage Two - Conscious Incompetence
Stage two is where you realise that there is more work involved in this and that you might actually have to work a few things out.
you consciously realise that you are an incompetent trader - you don't have the skills or the insight to turn a regular profit.
During this phase you will buy systems and e-books galore, read websites based everywhere from Russia to the Ukraine. and begin your search for the holy grail.
During this time you will be a system whore - you will flick from method to method day by day and week by week never sticking with one long enough to actually see if it does work. every time you came upon a new indicator you'll be ecstatic that this is the one that will make all the difference.
you will test out automated systems on Meta-trader, you'll play with moving averages, Fibonacci lines, support & resistance, Pivots, Fractals, Divergence, DMI, ADX, and a hundred other things all in the vein hope that your 'magic system' starts today.
you'll be a top and bottom picker, trying to find the exact point of reversal with your indicators and you'll find yourself chasing losing trades and even adding to them cos you are so sure you are right.
You'll go into the live chat room and see other traders making pips and you want to know why it's not you - you'll ask a million questions, some of which are so dumb that looking back you feel a bit silly. You'll then reach the point where you think all the ones who are calling pips after pips are liars - they cant be making that amount cos you've studied and you don't make that, you know as much as they do and they must be lying. but they're in there day after day and their account just grows whilst yours falls.
You will be like a teenager - the traders that make money will freely give you advice but you're stubborn and think that you know best - you take no notice and over leverage your account even though everyone says you are mad to - but you know better.
you'll consider following the calls that others make but even then it wont work so you try paying for signals from someone else - they don't work for you either.
This phase can last ages and ages - in fact in reality it can last well over a year - My own period lasted about 18 months.
Eventually you do begin to come out of this phase. You've probably committed more time and money than you ever thought you would, lost 2 or 3 loaded accounts and all but given up maybe 3 or 4 times.
Then comes stage 3
Stage 3 - The Eureka Moment
Towards the end of stage two you begin to realise that it's not the system that is making the difference.
you realise that its actually possible to make money with a simple moving average and nothing else IF you can get your head and money management right
You start to read books on the psychology of trading and identify with the characters portrayed in those books.
Finally comes the eureka moment.
The eureka moment causes a new connection to be made in your brain.
you suddenly realise that neither you, nor anyone else can accurately predict what the market will do in the next ten seconds, never mind the next 20 mins.
You start to work just one system that you mould to your own way of trading, you're starting to get happy and you define your risk threshold.
You start to take every trade that your 'edge' shows has a good probability of winning with.
when the trade turns bad you don't get angry or even because you know in your head that as you couldn't possibly predict it it isn't your fault - as soon as you realise that the trade is bad you close it . The next trade will have higher odds of success cos you know your simple system works.
You have realised in an instant that the trading game is about one thing - consistency of your 'edge' and your discipline to take all the trades no matter what.
You learn about proper money management and leverage - risk of account etc etc - and this time it actually soaks in and you think back to those who advised the same thing a year ago with a smile
you weren't ready then, but you are now.
The eureka moment came the moment that you truly accepted that you cannot predict the market.
Then comes stage four
Stage 4 - Conscious Competence
Ok, now you are making trades whenever your system tells you to.
you take losses just as easily as you take wins
you now let your winners run to their conclusion fully accepting the risk and knowing that your system makes more money than it loses and when you're on a loser you close it swiftly with little pain to your account
You are now at a point where you break even most of the time - day in day out, you will have weeks where you make 100 pips and weeks where you lose 100 pips - generally you are breaking even and not losing money.
you are now conscious of the fact that you are making calls that are generally good and you are getting respect from other traders as you chat the day away.
You still have to work at it and think about your trades but as this continues you begin to make more money than you lose consistently.
you'll start the day on a 20 pip win, take a 35 pip loss and have no feelings that you've given those pips back because you know that it will come back again.
you will now begin to make consistent pips week in and week out 25 pips one week, 50 the next and so on.
this lasts about 6 months
then comes Stage Five
Stage Five - Unconscious Competence
Now were cooking - just like driving a car, every day you get in your seat and trade - you do everything now on an unconscious level.
you are running on autopilot. You start to pick the really big trades and getting 100 pips in a day is becoming quite normal to you.
This is trading utopia - you have mastered your emotions and you are now a trader with a rapidly growing account.
you're a star in the trading chat room and people listen to what you say. you recognise yourself in their questions from about two years ago.
you pass on your advice but you know most of it is futile cos they're teenagers - some of them will get to where you are - some will do it fast and others will be slower - literally dozens and dozens will never get past stage two but a few will.
Trading is no longer exciting - in fact it's probably boring you to bits - like everything in life when you get good at it or do it for your job - it gets boring - you're doing your job and that's that.
You can now say with your head held high "I'm a currency trader"


I hope you've enjoyed this text and can recognise yourself in some stage or another - personally I'm at stage four now and am constantly making good amounts of pips - I've been trading in total for about 3 years and the first two were hell on earth.
for those of you reading this who stick with it, ill look forward to the banter we have together in the future when we are both bored to death during the trading day
Soultrader.

#8
Well done SoulTrader, sound analysis and reasoning; very nice delivery.
It's a shame we have to suffer through stages 1 and 2 before the truth of money management overpowers an irrational lust for quick riches. Just as you stated, I also didn't want to believe it even when I KNEW it was true. It has taken me quite a while to come to the realization that "needing to score big to succeed" is not what defines a successful trader.
Limiting losses is in fact, the one true road to steady consistent profits. Learning to develop instinctive trade management skills in combination with an effective money management strategy is paramount. Both of course must be guided and controlled within a risk profile defined and understood by the trader. That's what keeps trading accounts solvent, and our emotions under control.
Overreaching on trades without a true understanding of the risks involved blows up accounts. Our emotions are often overpowering and harmful to our equity when we fail to develop and work our trades within a reasoned and traceable trading plan.
In my opinion, personal development of a strong and instinctive understanding of the building blocks of successful trading (i.e.. risk, leverage, lot sizing, S/L, money management, emotions), is the key-critical component for success.
Almost any indicator or trade triggering system can become profitable if a trader has the building blocks in place and his/her emotions under control. Learn to manage your trades with consideration of these basic factors, and level 5 is not too far away.
Success is yours to control.

#14
You know exactly where I'm at - I knew someone out there knew what I was going through!
I opened my demo account on Jan 7, started trading on Jan 13 and quickly learned that I had no clue what I was doing.
I've been looking since then for info that will help me learn what do to - I mean the basics of what are pivot points and how are they used? How do I really read the bol lines? where are my moving averages? How do I use those to determine my exit points? So many questions that I need answers to - but the easiest way for me to learn is by hands on doing. Thank goodness for demo accounts.
But I've done exactly what you outlined in your post - 1, 2, and I've made it to 3 - now it's time to document what my plan really is - how will I trade in the beginning, what do I expect over the next xx week? what are the goals? are they reasonable? How do I manage my money? what is my risk level? (low, lower, lowest!).
I just told myself today - 1) discipline - gotta have that in order to leave the trade alone long enough for it to go with the trend (trade the trend!) - 2) money management - as I said before, since it's not cash, I didn't worry too much in the beginning about managing the money - now it's time to turn that around and manage the money before placing the trade 3) know my risk level (low, low, low right now) 4) document the plan! I haven't done that yet, but in order to be a success, I've got to have that document.

I still want to read everything I can get my hands on, just for different perspectives, but more for listening to those who know who can guide me - knowing they can't make the decisions.
And I realize it's not an overnight, get rich quick ticket. I've been told I can treat it like a hobby, but not to depend on trading as a way to make a living - but that's my goal. If I have to start with a mini account (which I will since I don't have the capital to fund a regular account), so be it -- as long as my pip gain is reasonable, it won't take long to open the regular account.
Thanks again for the post!

#19
Txtrader
I can see how Soul reckons your not at stage 3 yet. You've contradicted yourself by saying it's a slow learning curve but yet your convinced your one of the ones who doesn't need the 2.5 yrs to learn. You also say : and are more than willing (sometimes to our detriment) to listen to "those who know". Surely this means your not listening to the right people ? Maybe I've read your post wrong but i'm getting the impression you think you already know what you need to know when you don't. If you can't take someone else's comments, maybe your not cut out for trading. At the end of the day you decide whether you make it as a trader or not, but sure what do i know i've just about got to stage 3 after 3 yrs. Maybe you should try reading Market Wizards ?

#20
Oh, no, I'm more than willing to listen, I just lack the patience to be 2.5 - 3 years from being in phase 3. A year - 18 months? If that's what it takes, so be it, and I'm willing to wait - - but do I want to? no - - - do I have to? probably.
What I do understand is that I'm a long way from making this a real way of making a living.
As to listening to the "right people", I haven't found any "people" to listen to other than here - books, yes, internet sites, yes, but someone who's done this for a while, no. And that's what I'm looking for.
I don't discount anyone' s advice - they've already gained knowledge. What I will discount, and say that each and everyone one of us should realize, is that we all have different learning curves and different realization points, and should work with those as well as what we learn from those who've 'been there, done that'.
What I don't want is someone to discourage me from persuring this as I'm being discouraged closer to home.
I'm no expert, won't be for a long time yet, but won't let someone else tell me I don't know what I know. So maybe this isn't the right forum for me to be involved in.

#24
Txtrader,
There is a concept in learning called scaffolding. It functions just like the actual scaffolds used in construction. You can read lots of things about trading in a relatively short period of time, but you won't learn them when you read them. You may think that because you can remember them that you have learned them. Not true. I've seen it in language learning over and over again. Something you read today won't be of any use to you until you have a better foundation under it. It may be two years from now, but you'll say, "aha", now I understand what that means. So, you need to put the pieces in place, one by one. Each piece needs to be securely in place, or in actuality, truly learned and assimilated. This takes a long time.
In trading there are two components. The first is the technical side. It's probably the easiest of the two, but it takes a lot of practice and that practice takes time. It can be indefinitely prolonged by jumping from system to system. The best thing to do is to learn one system (or a set of systems emanating from the same basic principles of a larger system) thoroughly. However, just getting to the point where one realizes the necessity of this takes time.
The second component is the learning about yourself. There is no guarantee that this will ever be learned. I suspect a lot of folks go broke before they do so. It takes a long time to come to grips with how one really thinks, what one believes and values, and how they act upon those things. It's a grueling process with many detours and delays.
Putting the two together takes much longer than one can imagine. Now, I'd venture to say that the vast majority of people who try trading think that they are above average. They've had success in their life doing other things they deem to have been difficult. They figure they can just apply those qualities that brought them success in the past onto trading. It's just not that simple.
For starters, half the people in the world are below average. Yet, if you were to poll a thousand people at random, how many people would rate themselves as such? Now this is not a knock at those people. It's simply to point out the mind games we play with ourselves. Humans tend to delude themselves regularly. I'm the first to agree that there are benefits to doing so. But that same type of thinking doesn't work in trading.
There are very few professions in the world that require one to strive for self-actualization in order to achieve success in said profession. Trading is certainly one of them.
I'm also sure that many of us here have believed that we also could jump ahead of the learning curve. I'm certainly guilty of that. Yet, I've found that it's taking longer than I anticipated, but not longer than what everyone who has done it has said it would take.
Now, this is not to say that you won't be a trading wunderkind. It just very well may happen. But seeing as trading is all about probabilities, I'd say the probability of you beating the learning curve is not a bet I would want to take.
Finally, think of it this way. If you do succeed at trading and it does take you 4-7 years, so what? Any thing worth doing takes time. I spent 10 years going to college to get the job I wanted. Think of any profession you want and point out how many of them can be learned in 1 or 2 years. Once I finished my education it took me years to work up the position I wanted, just like any profession requires. But, just like my profession now, I can do it for the rest of my life. The same is true for trading. If you succeed at it, it's yours for the rest of your life. You'll be able to make a living at it for 20-30 years. But you're going to have do it the old-fashioned way....earn it. That takes time.
Nat

#39
Stage two seems to take forever doesnt it
The only advice i can tell anyone about stage two is to trade small.
My stage two cost me about £3000 - and that was on 10 pence a pip!
I found that my time trading demo was next to useless and in no way prepared me for trading so although demo trading is good for system testing its no use at all in training you to trade.
Open an oanda account with a small amount of capital, say $500 and trade at 5:1 maximum and pref lower until you show consistant profit - dont watch the money, watch the pips. Pips will take care of the money.
You'll be in stage two for ages and ages most likely, there are no shortcuts and no replacement for time.
One day stage 3 will happen - and it really does happen in just one day but you may not recognise it for a week.
Good luck on your journey

#44
exactly tx trader - trading on demo does not cost you anything - and no matter what you do to convince yourself your mind knows the difference and acts accordingly.
only a real money account, no matter how small, will give you a true feeling of your abilities.
Demo ac is fine for testing strats - but you could well find that a strat that works for you on demo doesnt work in real money and the only reason for that is your head
hope this helps

#46
Originally Posted by Soul-Trader2004

Quote

You have realised in an instant that the trading game is about one thing - consistency of your 'edge' and your discipline to take all the trades no matter what.


If you don't take anything else away from this post, please take this snippet!When I realised this, I realised how I could make money on the Forex.

#59
38-STEPS TO BECOMING A SUCCESSFUL TRADER
--------------------------------------------------------------------------
Steps to Successful Commodities Futures Tradingas published in Commodity Futures Trading Club Newsand in Traders Organization's Real Success Daytrading Course

1. We accumulate trading information - buying books, going to seminars and researching.
2. We begin to trade with our 'new' knowledge.
3. We consistently 'donate' and then realize we may need more knowledge or information.
4. We accumulate more information.
5. We switch the commodities we are currently following.
6. We go back into the market and trade with our 'updated' knowledge.
7. We get 'beat up' again and begin to lose some of our confidence. Fear starts setting in.
8. We start to listen to 'outside news' & other traders.
9. We go back into the market and continue to donate.
10. We switch commodities again.
11. We search for more trading information.
12. We go back into the market and continue to donate.
13. We get 'overconfident' & market humbles us.
14. We start to understand that trading success fully is going to take more time and more knowledge then we anticipated.
--------------------------------------------------------------------------
Many Traders Will Give up at this Point as they Realize Work is Involved

15. We get serious and start concentrating on learning a 'real' methodology.
16. We trade our methodology with some success, but realize that something is missing.
17. We begin to understand the need for having rules to apply our methodology.
18. We take a sabbatical from trading to develop and research our trading rules.
19. We start trading again, this time with rules and find some success, but overall we still hesitate when it comes time to execute. We start trading again, this time with rules and find some success, but overall we still hesitate when it comes time to execute.
20. We add, subtract and modify rules as we see a need to be more proficient with our rules.
21. We go back into the market and continue to donate. We go back into the market and continue to donate. 22. We start to take responsibility for our trading results as we understand that our success is in us, not the trade methodology.
23. We continue to trade and become more proficient with our methodology and our rules.
24. As we trade we still have a tendency to violate our rules and our results are erratic.
25. We know we are close.
26. We go back and research our rules.
27. We build the confidence in our rules and go back into the market and trade.
28. Our trading results are getting better, but we are still hesitating in executing our rules.
29. We now see the importance of following our rules as we see the results of our trades when we don't follow them.
30. We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better.
31. We continue to trade and the market teaches us more and more about .
32. We master our methodology and trading rules.
33. We begin to consistently make money. We begin to consistently make money.
34. We get a little overconfident and the market humbles us.
35. We continue to learn our lessons.
36. We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our contract size.
37. We are making more money then we ever dreamed to be possible.
38. We go on with our lives and accomplish many of the goals we had always dreamed of.
==================================================
Just came across this little tidbit. Working on 32 myself! One more step till the party starts

#64

Quote

i just like to ask you what were your mistakes.?


Thats a big question my friend.
and heres a list

Underestimating the power of trends in forex
overtrading
over leverage
top and bottom picking
lack of discipline
not having a thought out plan
revenge trading
listening to others too much
reading too much rubbish
lack of patience
being a system wh**e
trading too many pairs
thinking this would be easy (although eventually proved right )

and im sure there are many others that ive forgotten and are now a part of my unconcious processes
hope this helps
skype - nthint
Just my opinion,
Anatoliy.
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