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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Great post, mate! All very true. I’ll let you know when I get to stage 1! lol
Hi David,
Thanks for dropping by. And thx for comment. Surely if your twitter wallpaper is ur own set-up ur a Stage 5 guy?
http://twitter.com/davidpotts101
Interesting article. Did you summarize these from your personal experience and opinions? I think for me, I am probably 3.15, with occasions of pullbacks to 2.
Interesting thoughts. I agree with traders looking for the “holy Grail” and agree that buying a trading system is a big mistake. Hard work and discipline are two very important traits wjich make up successful traders. I enjoyed the post and your sight.
PS: I enjoy reading your posts. I have only gone through About AtticMan and AtticFund sections so far and feel the information are very thoughtful. Please keep up the good work. Thanks!
Good post well written, but how one ever becomes agnostic to losses I will never know!!
Thanks for all the comments guys.
Responding to each in a single post.
Mao – love the pullback analogy, maybe you should consider trading Breakouts to Stage 4! Keep trading and learning and trading and learning. My current struggle is in thinking in percentages. It’s really difficult for me to forget about my p/l and just think in terms of %. Stage 4 traders do that. Thanks also for the comments on the posts. I hope there is some stuff in there that you find interesting, please post more comments!
Banker – the more people that spread the Anti-Holy-Grail story the better off the world of trading!!
Thanks Alan for you comments. I admit a loss still hurts, but Im getting up off the canvas a whole lot quicker than I used to!
Hi Atticman, nice post it took me 10 years to get through these stages, I recognise each one
Hi Liberatedstocktrader,
How long did you spend in each Stage? And how did you know as you passed through the later stages?
Does a loss still hurt or are you able to totally accept one?
Any insights from someone at Stage 5 would be great.
Cheers
Saw your interview on Moneyshow.com and got interested in your blog. I’m not a stocktrader, I trade the Forexmarket, so I only read your articles about psychology. This article was a joy to read. Understading that I have gone through stage 1 and 2 and now sits in stage 3 really helped me get another perspective on my trading. And most important it showed me that I focus on the right things. Thanks for the inspiration and I hope you’ll reach a state of calmness in your new trading location.
Hi Daniel!
Very much appreciate your honesty!
I have travelling this same road since the year 2000, and had the unfortunate experience of getting in the market weeks before the tech meltdown. Truthfully, I have not made money yet, but am travelling the stages. I recently had to stop working as I required major surgery . This has turned into a blessing , as I now can do nothing but trade. One thing that I think is helpful if one is to give this their all, is to find a ‘mentor’ who is as committed and is successful and in stage 4 or 5. Granted, that may be hard to do, and perhaps what you are doing is more of a benefit than some would know.So thank you for your posts!
Be blessed and prosper!
jay O
Hi Ice Axe – Thanks for dropping by and taking the time to leave a comment. Understanding where you are on your trading journey really is an important part of making progress. It’s important to mention that not everybody goes through all the stages – for example I (thankfully) did not spend any time on stage 1 – in part due to my general cynicism and the belief that if its too good to be true then it probably is.
What is important however, is that we persevere until we all make it to stage 5
Hi Jay,
Thanks for you comment – good to know that the surgery turned out to be a blessing for you. I totally agree that finding a mentor who is in the advanced stages of their journey would be a great help for all those who are just starting out on their journey. I read an awful lot about trading and find advice and inspiration from many resources. The internet really has changed the way we gain knowledge and I thank you for your kind words about my blog. I know that I get so much out of writing it and I hope that those that read it also benefit
Hi Atticman,
I read your blogs and saw your questions and answer session at money show event.
This article is very honestly written, I recognise myself in stage 2 after tradig for around 2 years. Haven’t made any money yet, but learning day by day.
I just learn to have access to level 2 data from LSE which all professionals use! do you think it would help?
I believe in any educational program a need of a mentor is unmissable would you suggest to take any training courses like online trading accademy or some educational day course from Digital look etc.
I quickly want to move to next level as I think this is the right time to enter the market before I miss the boat.
Any advice or suggestion will be appreciated, even better do you coach people like me? To be trained by a person who has been through all stages and have learned from mistakes would be ideal situation to avoid further big mistakes.
Look forward to hear from you soon.
Hi Nadir,
Many thanks for your post and sharing your trading journey to date. In answer to your specific questions.
1. Level 2 data. Whether you need level 2 data depends on the type of trader that you are. If you are scalping or day trading then access to order flow can be an invaluable part of the trading strategy. However if you atr more longer term then End of Day data is more than enough
2. Educational Programs. I’ve only been on a single course since I started trading. This course was recommended to me by a trader friend. This is the only way that I would ever have attended a course. There are so many courses and trading programs out there that are simply designed to line the pockets of those that run them. My advice to you would be to continue to use free resources (websites, book etc) until you have reached a point in your trading where you understand yourself and your trading strengths and weaknesses. Trading is not a subject that you can be taught ‘right out of the box’ – it can take years to understand how to make money on the markets. My advice would be to keep reading, keep trading, protect your capital and don’t spend money on any course unless you’ve identified a specific need and a course has been recommended to you by someone that you trust.
3. You mention that you ‘quickly want to move’. One thing to remember is that the markets will ALWAYS be here. There is NO rush. I am currently taking a break from trading whilst I focus on some personal business. I am in no rush to get into the market as I know it will always present opportunities.
4. I don’t currently mentor any traders. I am still learning the art of trading myself. That said, I would be more than happy to answer any specific questions that you may have about any aspects of your trading.
Many thanks for the post, and I hope to hear more from you soon
AtticManTrader