Much has been discussed about the stages that a typical trader will encounter as they progress on their journey to profitability. I’ve been through a number of these stages as I am sure you have. At every stage along the way (until you reach Stage 5), there is a likelihood that your journey will end. Indeed if you believe all you read, only 5% of traders are profitable. My guess would be that those 5% exist across stages 4 and 5, meaning 95% of those that start trading give up when at Stage 1, 2 or 3. If you make it through these stages, there is a strong probability that you will become one of a select few that can proudly state that you are a consistent, professional trader. When reading the below, ask yourself whereabouts in your trading journey are you. Personally, I have recently entered Stage 4, although from time to time I must admit to still being in Stage 3!

Stage 1 – Acting on tips from friends and ‘professionals’. This is where most traders/investors start, and end, their journeys. They act on hearsay and advice from ‘professionals’ and friends. These traders/investors do not understand money management or risk. They have probably never heard of a stop loss or a profit target and have certainly never thought about writing a trading plan. Instead they will pile their cash into a company because ‘Joe in accounts gave them a hot tip’. Sadly these tips can not go on forever and the journey’s of these traders will invariably end in 1 of 2 ways. Most likely after a series of devastating losses, then will simply close their accounts and believing that trading is tantamount to gambling they will vow never to return to the markets. Those whose journey does not end at this point, will move quickly into Stage 2.

Stage 2 – Information overload and the holy grail. Those traders who do not give up at Stage 1 will likely enter into a wonderful and exciting stage of their journey. They will consume as much trading material as they possibly can. Their focus will be on finding trading systems that guarantee victory! They may even purchase a couple of systems (NO NO NO!!). They will skip from one system to the next constantly searching for the holy grail – that one system that delivers consistent profits. They will tweak settings on Moving Averages and Bollinger Bands, each time thinking that they have cracked the trading code. They will have periods of success that makes them feel great. They will believe they have made until, until one day, their system simply stops working and they enter a period of losing trades. They will scratch their heads and maybe even tweak a few technical aspects of their systems. But the reality is, they have realized that the holy grail does not exist. Despondent, many will now quit, convinced they have tried everything in their power in order to make money in the stock market. Those that don’t quit will move to a different and even more challenging stage in their trading journey

Stage 3 – Profit and Loss (Large P/L and emotional swings). One day thinking you have made it, the next thinking that you have not. If a trader makes it this far, it’s my belief, that they have a great chance of going all the way. They now understand two great lessons. 1 do not listen to other people and 2, there is no holy grail. Traders at stage 3, may now be developing the mind of a trader. They may already begin to understand the emotional and psychological aspects of trading and how vital these elements are. They will certainly have figured out what kind of trader they are (technical or fundamental, trader or investor, short and longer term) and they will now understand what is important in trading. They will likely enjoy sustained periods of success, only to be followed by depressing periods of drawdown. They will one day believe they understand how to make money, only for the next day to believe that they do not. This period of the trading journey can be a long and emotional one (trust me on this). This stage requires significant perseverance and belief in one’s self. Few traders will actually give up at this point, many will continue to trade with a modicum of success. Perhaps it will become a hobby, that every now and then pays for a holiday or car insurance. It’s not a bad place to be. Traders at stage 3 are unlikely to lose all their money. But unless they move to Stage 4, they will not be able to take a shot at the title.

Stage 4 – Consistency. The early stages of being a consistent trader can be like sitting on a knife edge. There are periods when you suddenly believe you are back at Stage 3, a series of losses can still occur and you begin to doubt your ability and your system. This is not unusual, but most traders at Stage 4, will have the emotional understanding to identify and rectify this emotional state. It may be that they simply take time away from the markets, or (as in my case) they revert to low risk mechanical (technical) systems that can remove these emotions. They will totally understand that trading is a percentages game and that they only way of winning is by protecting their trading capital and by being disciplined in their approach. This Stage can last for years. Understanding and dealing with emotion can take many years. Until such time as wins and losses do not affect your mindset you will remain at this stage.

Stage 5 – Professional. These dudes are trading for living. They are sat in their home offices totally comfortable in their ability to make a living trading the financial markets (that felt REALLY good to write!). They have experienced periods of profitability and periods of loss and are agnostic to both. They accept that trading is simply about probability and being consistent in their approach of finding and trading edges. They will also likely have sizable trading accounts as they will be risking 1% or less on each position and looking to make 2-3% per trade.

Getting to Professional status is the dream of many (if not all) self-directed traders. Understanding the journey and the Stages in that journey will help us all to plot our paths to Stage 5.

Whereabouts are you in your trading journey?

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