Stages of a Trader.

The path a trader must take to achieve profitability.

1. We accumulate information - talking to other traders, buying books, watching videos and researching.

2. We begin to trade with the little knowledge we have acquired.

3. We lose money to the markets then realize we may need more knowledge/information.

4. We gather more information hoping new knowledge will turn around our trading.

5. We switch the financial instrument we are currently trading.

6. We go back into the market and trade with our 'new’ knowledge.

7. We lose even more money and begin to lose our confidence.

Fear starts setting in.

8. We start to listen to other traders on Twitter, Youtube and talking heads on CNBC and Bloomberg News.

9. We continue trading and continue to lose money. The people on Twitter or TV seem to be successful traders and they talk about a trading plan, a process and discipline but for some reason, none of this makes sense. We are like a paper airplane caught in a hurricane. Max emotional pain and anger is felt here.

10. We are frustrated beyond belief and switch financial instruments again.

11. We search for more information, hoping an experienced trader knows what the market is going to do, someone who can predict the future. The experienced trader tells us of a need to have a trading plan and shows us a simple strategy - this is a major revelation.

12. We go back into the market, try that strategy and by pure luck we make a little bit of money.

13. We get 'over-confident' thinking we figured it out and in the very next trade we give it all back and more.

14. We start to understand that trading successfully is going to take more time and more knowledge than we anticipated and finally realize we need a plan/system/method to trade the markets.

Most people will give up at this point, as they realize Trading is hard work.

15. We get serious and start concentrating on learning/creating a 'real' plan to trade the markets.

16. We trade our plan with some success, but realize that something is missing.

17. We begin to understand the need for having rules to apply to our trading Plan.

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 over all 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 feel we are very close to crossing that threshold of successful trading.

22. We start to take responsibility for our trading results as we understand that our success is in us, not the trading plan.

23. We continue to trade and become more proficient with our plan and our rules.

24. As we trade we still have a tendency to violate our rules and our results are still 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 the rules.

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 ourselves.

32. We master our trading plan and our trading rules.

33. We begin to consistently make money.

34. We get a little over-confident 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 than we ever dreamed possible.

38. We go on with our lives and accomplish many of the goals we had always dreamed of.

-Written at Commodities Corporation. Updated by Nepali Trader for modernity.

Another Version of the Trading Journey.

Stage One: The Clueless Trader

1) Heard of a day trader making millions, or buying options is safe and can make you rich quickly

2) Got lucky in an earlier stock investment.

3) After all, how hard can it be? The money sounds appealing and the freedom to be independent sounds attractive

4) Every trader is optimistic

5) You open a direct access brokerage account and the sound of Level II, ask/bid, and market makers make trading sound like hi-tech video game

6) You will buy just to see the market reverse and you will short just as the market starts to rally.

7) Most of your trades are done emotionally. You buy just because the markets feel strong without any logical reason

8) You have no clue how the mechanics and psychology of trading works. What's worse? You are not aware that you don't know

9) Most traders will blow their entire account at this stage.

10) Mostly you start your trading in a bull market

11) You will spend more time finding a broker charging least brokerage, how to save tax, and like companies paying dividend and issuing splits and bonuses and less time in learning what trading actually is.

12) A big majority of people will leave trading and blame the randomness of markets, or say markets are always manipulated

13) Generally you start with fundamental analysis and put money in "good" companies and don’t forget to watch CNBC

14) You don’t know what is short selling or have never tried it, no idea of stop loss as well

15) You are in the unconscious incompetence stage, in this stage your capital is at maximum risk

Stage Two: The Rookie Trader

1) In this stage you have lost enough money to realize what you are doing is completely wrong. In other words, you start to realize that you don't know.

2) You will then devour every trading book available.

3) Your search for magic indicator and the holy grail starts here

4) You will memorize every technical pattern known to man. You will read about the ADX, moving averages, Fibonacci lines, pivot points, MACD, Bollinger Bands, channels, etc.

5) You will go through the "help" tab on your data vendor to read about every single technical indicator available

6) You will plot them on your charts and spend hours looking for an indicator that works

7) You will be extra confident now, thinking you have found the magical technical indicator

8) Yet, you still continue to lose money every day. You realize that your indicators are lagging and that every other new trader is probably looking at the same thing.

9) You realize that you are the sucker

10) You are in the conscious incompetence stage

Stage Three: The Developing Trader

1) You start to realize the amount of work required and the immense learning curve that you must overcome to understand the markets, maximum pessimism is experienced here

2) At this point, traders may find it overwhelming and quit. Stronger minded traders will push their motivation harder to start their second spurt for knowledge

3) Hunger and passion is needed to clear this stage

4) You will ask a thousand questions and bug every professional trader you meet. You will read a thousand trading articles

5) You will start paper trading, develop strategies and setups, and define risk parameters for every trade

6) You will go on a hunt for self-understanding to master your psychological game

7) You will visualize every possibility on a trade before you take it.

8) This is the true learning phase. You are trying hard to develop your edge in trading.

Stage Four: The Determined Trader

1) This is the stage in which you learn to specialize in certain markets and trading methods

2) Without realizing it, you have finally found your style of trading after hours of hard work and research. You stick to your method and you improve it

3) You realize that you need an edge whether its tape reading, price action or being a Fibonacci expert. The important thing is you are slowly transforming yourself into a specialized trader

4) You test your method and they seem to work. You gain tremendous market knowledge.

5) You reflect back on yourself and you can't help but laugh at your foolishness.

6) Although you have not made enough money to call yourself successful you are proud of your journey and accomplishments

7) You realize that the Holy Grail is not about technical indicators or price patterns

8) You calculate risk before profits and place strict money management on all your trades.

9) You cut losses short and learn to scale out on your winners.

10) You start to accept losing as a natural part of the game

11) You take high probability trades that you have tested and feel confident about your setups because you understand that trading is a game of probabilities

12) Your psychological makeup has changed from an amateur mindset to a professional one.

Stage Five: The Consistent Trader

1) You rely on your trading method and start taking trades systematically. You try to aim for consistency and are meeting your daily goals often.

2) You are fully aware of your strengths and weaknesses as a trader.

3) At times you feel euphoric and at times you feel pain. But you are able to understand your own psychological makeup to control your emotional swings.

4) You are now able to trade for a living

5) You have reached the conscious competence stage

Stage Six: The Expert Trader

1) In this final stage, you completely understand the markets you are trading. Being involved in it every day you are aware of every key price level

2) You understand market concept and are able to predict the direction of the markets a fairly good amount of time.

3) You pat yourself on your back and take profits as soon as you feel euphoric. You do this because you understand euphoria is the same as emotional trading.

4) You talk to other traders and realize the development stage they are in

5) People start asking you for trading advice, you publish a book, and you have a specific trading methodology that represents you!

6) Taking trades come naturally and you are able to get in and out at the precise price levels based on price action.

7) Instead of having the markets take your stop out, you exit when you know you are wrong.

8) You keep your head high but remain humble on the inside. You have now officially graduated the school of the hard knocks

9) You have reached the unconscious competence stage. You are a successful professional trader now.

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. 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

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.