The Evolution Of A Trader - And The 55 Steps

This article contains two ways of looking at the path traders take to success. The second is a little light hearted but no less true for that! For some years I have set out a simple process which all traders seem to encounter on the road to success. This is detailed below and thereafter I expand this in a way which I feel will be useful for those who want to tread this path.

STARTS OFF “Greed orientated.”
Loses because:
1 Market problems
- a Not a zero sum game, a “very negative” sum game
- b Market psychology – doing the wrong thing at the wrong time
- c The majority is always wrong
- d Market exists on chaos and confusion.
2 Own problems
- a Overtrading
- b No knowledge
- c No discipline
- d No protection against market psychology
- e Random action through uncertainty, broker’s advice for example
- f Market views.
RESULT: the “greed orientated” trader gets a good kicking and becomes “fear orientated.”
Loses because:

1 Market problems as above
2 Scared money never wins
3 Own problems
- a Still overtrading – derivatives
- b Fear brings on what it fears
- c Tries to cut losses too tight creating more losses
- d Still no real understanding of what it takes.
RESULT: Traders who persevere “travel through the tunnel” and becomes “risk orientated.” This is when they start to make money because they:
1 Develop a methodology which give them an edge
2 Use an effective Money Management system
3 Develop the discipline to follow their methodology
4 Erase “harmful” personality traits.

This sets out the bare bones and you will note that there are three basic stages. As I often say it is curious that many things come in threes in the markets. Major trends can be sub-divided into three, there are three key trading rules, etc. The three key trading rules in fact equate to the three stages through which traders must pass.

The three stages
The three stages have been labeled “greed orientated,” “fear orientated,” and “risk orientated.” However, these labels are not meant to be too literal, they are merely an attempt to approximate to the three key stages.

Greed orientated
The first stage is characterized by ignorance and the thought that the markets will provide “easy money.” The actual emotion driving the new trader may not be greed, indeed it is often something else. A successful businessman or professional may be seeking a new challenge. Similar individuals may just be a little bored with their lifestyle and want some- thing to spice it up. Others may be compulsive gamblers. One of the first problems facing a new trader is the very motivation to trade. Most people do most things emotionally. The decision as to which car to buy, which holiday to go on, etc. is usually based on emotional criteria. Just think why you own the car you do, why you married (or did not) the person you did (or did not). It is no surprise we come to the market and continue to make emotional decisions. But these will not work in the market because the market is an emotional animal itself and when the emotion is screaming sell, the successful trader is more likely to be buying. If we think about traders who are in the market to relieve boredom it becomes clear that the strongest impulse to trade will come when they are most bored. There is no reason why this emotional point should correspond with a good time to trade the markets. Other traders suffer from self-esteem problems, indeed I think we all do from time to time. If so, an argument with another person can again set the trader up for taking a position, to counterbalance the low self-esteem. All these problems have to be dealt with before a trader can find success and, in my opinion, the only way in which the trader can “see” himself/ herself is by using a fairly mechanical “system” so that he/she knows what he/she should be doing. In this way the trader can begin to see when his/her actions do not correspond to the system and start to question why this should be. It is through this process that we can begin to understand ourselves. I believe that this is a key requirement for trading success. Because of these and other problems, as outlined above, novice traders lose a suf.cient amount of cash to cause pain, many (most?) lose all their cash. The key point is that they become fearful as a result. At the same time they begin to realize the first secret of trading: cut your losses. It is this concept which marks the move to fear orientation. Indeed cutting losses can be seen as a reaction to fear.

Fear orientation At this point stops are used, but they are generally placed too tight. The trader has realized that trading is not easy and that a lot of hard work is required. Many fall by the wayside around this point. But those who persevere do show the necessary commitment for success. But greater tests may still come and that commitment is not always enough. Fear orientation is inevitable given the nature of the beast, i.e. the human being. The market is not terrifying, or bad, or difficult. It just is what it is, and it gets on with its own business. It is how we perceive the market and how we act that causes the problems. We must realize that we are responsible for our results, nobody else, least of all the market itself. It is only when we accept responsibility that we can start to win. If our losses are someone else’s fault then we are in effect saying that we have no control. If we have no control how can we win? This stage can last a long time as we work out our various problems. Fear is not helpful in the markets because scared money never wins. We cut losers too quickly and we take profits too quickly. Our trading is characterized by nervous, over quick, action.

Risk orientation To become risk orientated we must make progress on all fronts. Knowing ourselves, changing as need be, understanding the trading process better, adjusting our trading methodology to suit ourselves, learning to relax when trading; these are a few of the necessary requirements. Most people should immediately at least halve their trading size and that can bring immediate relief/relaxation. Risk orientation gets its name because you need to understand risk in order to win. Trading is a risk business, when you become risk orientated your orientation is right for the market. The key trading secret at this point is letting profits run. It is at this point that you may start to make consistent profits in the market. Before you reach that stage you should never trade more than the minimum size, i.e. one contract. Why pay more in tuition fees than you need? Once risk orientated you may learn the final trading secret, trade selectivity. Once you have that down pat it can all become less exciting. I make money consistently but I still find myself occasionally taking too many trades. To master trade selectivity you have to become an expert in your chosen approach. The key aspect of your approach is that you filter out a vast amount of market information and just focus on those factors which you need to know. It is a lot easier becoming expert in a narrow field than a wide one. The various sources of market information are so vast that it is not possible to take it all in. Let alone become an expert in it. You must decide what information you want, design your approach and then use it. Become an expert and you will find that you become intuitive, that is when you can select only the best trading positions, the low risk ones. Then it will all go the right way.

The 55 steps

A simplified summary of the key steps taken by John Piper to get where he is today.

1 We are intrigued by the market and start to do some preliminary reading and research.
2 We buy a book or two and perhaps some newsletters.
3 We find something we quite like and start doing some research using this particular technique.
4 We dabble a bit in the market, trading every now and then, mainly losing money, but not much, and having the occasional winner.
5 We generally forget about the losers and congratulate ourselves on our winners. Convincing ourselves that once we learn the techniques better there will be fewer of the former and more, lots more, of the latter.
6 We keep manual charts, which may become quite large physically, and maybe plot a few indicators manually (this was before computers became quite so available).
7 We spot an approach to the market we think cannot fail to win!
8 We start to trade actively.
9 The results make it clear that it is not as easy as appeared to be the case. There were a few key points we failed to fully appreciate.
10 We continue to trade. Results are fairly indifferent (to bad) but there are enough profits to keep the interest up.
11 We continue to expect great results.
12 Trading volume increases and the amount of money in the market grows.
13 We continue to read and take newsletters, but our research has only scratched the surface. We still have no real idea what we are involved with.
14 Our technique scores a major success (the ‘87 Crash), but our lack of trading skills means that we do not profit from it as we might.
15 The market begins to instill a little fear but we have yet to learn the first key lesson.
16 We keep trading in size. We are overtrading and clearly act as a fugitive from the law of averages. It is only a matter of time.
17 We make a big profit. It is all going well, we start to get overconfident.
18 We suffer a big loss. Psychological problems start to develop.
19 We buy a computer and start to monitor many more indicators.
20 We look at other techniques and other markets.
21 We get wiped out.
22 It becomes clear this is not at all as easy as it looks.
23 We become impossible to live with.
24 It also becomes clear that the information available (in 1987/88) is not much use to those seeking to make money from trading.
25 We determine to fill this void and look to create a newsletter telling it how it is.
26 We work with an analyst in the USA. Note how inappropriate this is for someone who wants to trade. Much better to work with a trader!
27 We continue to trade, but in a much reduced manner.
28 We start our newsletter which is an immediate success.
29 This requires a lot of research plus a lot of self analysis, but it is still not clear that trading is a psychological issue and that the externals (systems/software/computers/brokers/advisers, etc.) are almost completely irrelevant until the internal is set up right.
30 We are plagued with fear and have no clear methodology.
31 It becomes clear that judgmental trading (without a clear methodology) is a dead end.
32 We start to look for a suitable methodology.
33 Those available on the market do not seem to be suitable and so we design our own.
34 We start to trade using a clear methodology. This is not easy but some things start to become obvious.
35 We find ourselves trading for no good reason (something that was impossible to detect before we had a clear methodology), but then realize that it is due to an argument earlier. Self esteem clearly plays a role.
36 We realize that the key element in trading is our own mentality.
Now we can start to make some real progress.
37 We improve our systems and start to make some money on a one contract basis.
38 But we are still fearful and this remains a big problem. We learnt, some time ago, the necessity of cutting losses, we cannot get to the second secret until we deal with the fear.
39 We keep trading and we continue to do OK, we start to get more confident and the fear starts to dissipate.
40 We take another big hit.
41 We feel awful and think we should perhaps give up, should perhaps have given up some years ago when it all went wrong the first time.
42 We keep trading and determine not to get overconfident again. We reinforce the stress management systems we had to learn in the early days and keep meditating (essential to trading success?). We realize the importance of remaining humble and also of being an “empty vessel.” If you are full of yourself there is no room to learn anything else.
43 We meet another trader who becomes a mentor. He introduces a new (to us) technique (Market Profile) which immediately “fits.” This is because we now have the right attitude.
44 We build on our successes. Systems improve, results improve, and our mental attitude improves, fear becomes less of a problem.
45 We decide to see a trading coach/psychologist (Adrienne Toghraie) and have an initial meeting in Switzerland.
46 We make a big profit by letting profits run. We have managed to do what every successful trader must. Can we repeat this trick?
47 We start to move away from fear, and start to become risk orientated.
48 We realize that mental attitude is all. We see that it is vital to be relaxed, we reduce position size, again!
49 We spend a few days in the USA working in a group with our trading coach/psychologist.
50 We begin to make money with consistency.
51 We get a little overconfident, again! But this time we realize the fact and the damage is limited. But we learn, again, to remain humble.
52 We start to trade almost subconsciously some of the time. We are becoming expert.
53 We know there are still many challenges ahead but we are confident that we will deal with them.
54 Money ceases to be a problem, we truly live in a world of abundance.
55 We find that our lives improve across the board and that we are achieving in a wide range of areas.

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