Download 6 Stages of a Typical Trader

6 Stages of a Typical Trader
While many aspire to be a successful trader, the truth is that it is not an easy journey. This
journey not only involves skills and knowledge, it requires hard work, effort and
perseverance at the same time. Though many might display these key traits and qualities,
many of these individuals give up before their real journey as a trader even begins. Below is
a summary of 6 stages that a typical trader will undergo, and hopefully it will be reminder to
all readers and myself not to give up too early or easily when nothing seems to be going
right.
Stage One
This is where every beginner trader starts. He has totally no clue or understanding about the
financial markets. He has no concept of the interrelationship among markets as well.
However, he knows that trading is a good way of making money because he has heard so
many things about it and the many success stories of famous billionaires that make their
mark through trading. At this point, the trader himself knows nothing about price charts and
indicators. They are nothing more than a colourful painting with bars that are moving up
and down. To him, trading is a game of chance – prices either move up or down – a 50-50
game just like those in the casinos. Anyone who can correctly predict the price direction
base on the charts is like a semi-deity with superpowers that were bestowed upon them.
Interest in trading starts to build up and the trader himself finally decides to observe, read,
study and try to understand all about trading. He hopes that he will be able to grasp the
trick to trading as soon as possible and start making big bucks for himself in no time.
Stage Two
However, as the trader reads more and more, he starts to realize that there are a lot of
things to be learnt and that trading is not a game of chance. There are complex skills to
master and currently, he is nowhere near competent enough to trade to yield a profit on a
consistent basis. During this phase, he will buy numerous books, read several websites from
just about anywhere in the world including Zimbabwe and Afghanistan, and listen to anyone
on the internet who claims that he has made it big by using a certain strategy. Basically, this
is the stage where the trader begins his search for the holy grail, hoping that he can be a
successful trader as soon as possible.
During this time, the trader will be a try-it-all. He will try out different methods every other
day or week but never sticking with one long enough to actually see if it is effective. Every
single time he comes across a new indicator, he will be overjoyed, thinking that this new
indicator will be The One which will make a real difference and turn him into a successful
trader. He will experiment with moving averages on Monday, and then combine it with
Fractals and Fibonacci on Tuesday. On Wednesday, he will then switch to Stochastic and
Divergence. On Thursday, he will try out MACD and the Elliot Wave Theory. On Friday, he
will then test out some exotic indicator he read on the internet.
At other times, he would incorporate too many indicators onto his charts at one time such
that anyone who walks past might be forgiven for thinking that his MT4 trader is some sort
of an artistic painting. With a million indicators on his charts, the trader cannot make a
decision since they rarely agree. So he focuses on those which agree and make an entry.
More often than not, it turns out badly and the trader’s mind starts to turn crazy as he tries
to figure out which indicators to follow when he is trading.
Stage Three
When the trader finally regains his sanity, he will then move on to stage 3. At this stage, the
trader will find himself chasing losing trades and perhaps even adding on because he is so
certain that he is right. With all that he has read about the market and indicators, his
prediction has to be correct. While he might be right at times, chances are he is always on
the wrong side of the trade. Often when he goes long, he would see prices fall, triggering his
stop loss in the process, only to see it rise to record-breaking levels. The trader will lose
money on a consistent basis and when this has happen long enough, he will take a step back
and read up more on each indicator and study each chart pattern further. The next time a
particular signal appears, he will tell himself to sit out and watch how it goes. True enough,
his prediction is right and he tells himself that the very next time he sees another signal, he
would give it a go. Soon enough, a signal appear and he takes up a position. Unfortunately,
he takes a full hit on his stop loss and fails miserably.
He will go to forums and see other traders making big money and start to wonder why he is
not one of them. It will reach a point where he starts to think that all these traders who
claim to have mad big money are all liars because he has studied everything but he is not
making any money. He believes that he knows as much as anyone else and since his account
is not growing, those people on the forums must be lying. He feels betrayed by the market,
the books, the brokers and the market ‘manipulators’. He doesn’t understand why every
time others make a trade, it is a winner. Whereas for him, every time he makes a trade, it is
a losing trade. This slowly turns into anger which in turn blinds him. He starts to blame
everything possible – his dog, his computer and even his parents. In some cases, the trader
will give up totally and never return to this promise land ever again.
Stage Four
If the trader doesn't quit, he will then move onto the 4th stage. This is the moment where
the trader will have a sudden realization. He suddenly realizes that no one can always
accurately predict what will happen in the market. At best, one can only tilt the odds
favourably towards him, but not 100% totally. At the same time, the trader will also begin to
draw lessons from the mistakes and things he did in previous stages. From the various
experimenting with different indicators and the countless attempts with the identification
of less-than-perfect chart patterns, he gradually discovers the kind of trader he is and starts
to see which kind of ‘trading style’ best suits him. On top of these, he will slowly figure out
what sort of trading he is most comfortable with – long-term, short-term or even scalping –
and start to focus on it instead of wandering about like a lost soul.
This is also the stage where the trader tries to mould his own way of trading. He no longer
seeks for ‘The One’ indicator that will provide the best entry signal or tries to incorporate a
million indicators onto his trading platform. Instead, he focuses on a few indicators which he
is the most comfortable with and uses it long enough (as opposed to in stage 2) to see if it is
really effective. If it doesn’t work out, he then moves on to other combinations and
continue to trying the find the perfect system for him.
Stage Five
As the cliché goes, nothing is impossible. With enough determination, the trader will
eventually discover a system that suits him totally. He will have complete confidence in his
system because he has tested it out thoroughly and it proves to be profitable on a very
consistent basis. With this ultimate weapon, he is ready to challenge the almighty market
once again.
But this time, he will only take a trade only if his system gives a strong signal and does not
make any risky decisions hastily. If the trade turns bad, he will not get angry because he
knows that one cannot always predict the price movement correctly. When a trade turns
bad, he would close it instead of adding more lots to it. He knows that the next trade will
have higher odds of success because he simply believes in his system and he knows that his
system works.
Therefore, instead of being put off by his losses, he accepts them as a part of the natural
course of business. He would examine every losing trade and try to figure out if there are
any errors that can be corrected. He also starts to realize what trading is all about –
consistency and discipline. He will once again learn about proper money management,
leverage, and risk of account. But this time, he actually internalizes these things and he
would think about those who had advised him on the same things before with a smile. At
the same time, he continues to make minor changes to his trading strategy, carefully
tweaking it and perfecting his very own trading system.
Stage Six
Slowly, trading becomes second nature to him. It is an effortless activity because he has
done is so many times he is thoroughly familiar with his plan. Reading and analysing charts
and indicators are now the focus of his time and effort and he is prepared to make a call in
any given situation. He becomes very familiar and sensitive to the flow and tune of market
behaviour and this provides him with an edge. He doesn’t have to know what will happen
next but he is confident that he can react correctly to anything the market does.
At this stage, the trader knows exactly what he is doing – waiting for the right opportunity
to present itself. When it does, he acts decisively without hesitation and rake in the profits
when prices reaches his target level. Then, he waits again for the next opportunity and this
cycle repeats itself. This is the stage where the trader becomes very confident in his
judgment. However, he does not try to outsmart or outguess the market. He understands
that the market provides the ultimate truth and it would be foolish to attempt anything like
that.
The trader has, too, removed all emotions when it comes to trading. He doesn't get overly
excited about record-breaking winning trades and he doesn't get too depressed when he is
on a losing streak. Winning and losing is all part of the job and virtually nothing can hurt him
because he is well-protected by his discipline and rules that have brought him considerable
success so far.
When the market closes at the end of the day, he then reviews his work and makes
whatever adjustments are necessary. But often there is nothing worth adjusting and he
proceeds to his preparation for the next day. Satisfied with the additional few grand in his
account, he gives himself a pat on the back and proceeds to having a good night sleep.
Conclusion
While the journey for all traders might not be identical to these 6 stages described above, it
is highly likely that most will undergo a somewhat similar journey. It is important to note
that the time spent in each stage varies from people to people and some stages can last as
long as 2-3 years. So if you find yourself stuck in stage 2 for more than a year, fret not, you
are not hopeless in trading. Perhaps what you need is some guidance from the right people
and before you know it, you will be in stage 6 raking in big money every day. For some,
stage 2 might be their longest stage whereas for others, it might be stage 3. However,
regardless of the time spent in each stage, the underlying message is to keep trying and
never give up. Always seek advice from successful traders and don’t ever have the mentality
that you are a know-it-all, even after you have become successful. So for all traders who are
fighting their way to stage 6 of their trading careers, hang on and good luck in your trading
journey!
Chan Jia He
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