Wednesday, June 27, 2007

How Can I Learn Trading?

A blog reader recently asked me this simple, but not-so-simple question. My book Enhancing Trader Performance is an attempt to describe the process by which traders (and professionals in other fields) develop expertise, and I know of quite a few traders who are using ideas from the book to guide their own development.

It's difficult to know where to start, however. There are many mentoring services out there, but many are quite pricey. That's a real problem for beginning traders who may be flush with ambitions, but not necessarily with cash.

My own bias, as long-time readers are no doubt aware, is that learning how to trade is not a matter of finding the ideal indicator or trading pattern. Rather, trading is a performance skill, not unlike chess or baseball. That means that trading consists of component skills that must be practiced and refined over time. No amount of self-help psychology or trading seminars can substitute for screen time and the cultivation of skills related to pattern recognition, execution, and risk management.

Here are a few thoughts regarding ways of initiating this learning process:

1) Start With a Framework - At the mentorship program I developed for a Chicago prop firm, we used Market Profile as a framework for understanding bids, offers, the market auction, trends, consolidation areas, how markets establish value, and the interplay of time, price, and volume in the establishment of value. That isn't to say that there aren't other possible, valuable frameworks out there, but I find Jim Dalton's introduction to the markets to be user friendly and highly practical. It's a way to think about markets. Too often new traders try to start by learning technical patterns and setups, without really understanding how markets operate.

2) Start With Observation - I say this so often traders must get tired of hearing it. But protect your capital and protect your psyche during the learning process! Jumping into markets and trading against the pros without proper preparation is the way to learn bad trading and emotional habits. When I began my own learning process, I printed out charts every day of the ES, NQ, and ER2 markets; volume; and NYSE TICK. To this day, those charts fill several drawers of a filing cabinet in my office. Reviewing them every single day helped me *see* ranges and breakouts and patterns of confirmation and non-confirmation in market moves. Train your eye before you risk your capital. Learn one or two patterns well and build on those. Trading blogs and books are good sources for patterns that you might want to start with. Don't be too much in a hurry to "trade for a living". That's more performance pressure than most people can bear.

3) Start With Simulation - Yes, yes, I'm very aware that simulated trading (paper trading) is not the same as the real thing. But there's a reason basketball and football players engage in scrimmage games, and there's a reason chess champions practice their game outside of tournaments. Simulation enables you to make your mistakes and learn from them *before* you risk losing in the real performance. It's also helpful to first practice skills without the pressure of making money. If you can't make money in simulated trading, you certainly are not going to succeed going live. Simulation is the bridge between learning and doing; it's an important skills-builder. Check out programs, such as Ninja Trader, that offer free simulation versions. They help you practice, but also help you keep score and track your progress.

4) Start Thinking Like a Trader - That means knowing what traders look at when they assess markets, the economy, news events, etc. I subscribe to the Wall St. Journal, Financial Times, and The Economist for U.S. and global perspective among print publications. I also follow the linkfests of several of the best financial blogs, including The Kirk Report, The Big Picture, Trader Mike, Abnormal Returns, and Seeking Alpha. They do a great job of sifting through the news and current events. If you're learning stock picking, avail yourself of the excellent resources out there, such as Kirk's Screen Machine and the StockPickr site. Consider joining a community of traders that shares trading ideas, such as StockTickr. If you're learning market timing, consider tools such as Market Delta and Trade Ideas/Odds Maker. To see how other traders are doing it and learn from their examples, check out the VesTopia and Covestor websites and such online trading rooms as Woodie's CCI Club. (Please note that I have no financial affiliation with any of these sites or services).

If I were starting out as a trader now, I would keep it very simple. Along the lines of my recent post, I'd learn to identify ranges in markets and ways of determining when markets are likely to remain range bound vs. break out and trend. I'd practice just those two setups: breakout trades and "mean reversion" trades that move from one end of a range toward the other. I'd start very small, and I'd learn to set stops and target levels based upon repeated experience with these patterns.

If you were to aspire to join the PGA tour and compete against the best golfing pros, you'd undergo a lengthy process of preparation and practice. The stock market is the PGA tour of trading professionals and no less spade work is needed for success. You're most likely to succeed if you have a curriculum, a way to practice skills, and a way to learn from your successes and shortcomings. I've been trading since the late 1970s, and I still feel like a student of the markets. You're always learning, you're always developing. The successful traders are the ones that sustain this learning curve by embracing it.


Six Keys to Trading Success

Pain and Gain in a Trader's Development

What Contributes to Profitability?


Kathy said...

You said it all Doc.

I would add that trading is like any other sports, only a few out of hundreds and thousands can become good at it. By the time you find you are good or not, a few years had passed.

Brandon Wilhite said...

Great posts! IMO you really hit it with these two recent posts. I just want to echo the 'preserve your capital' sentiment. I paid for some pricey teaching and mentoring 2 years ago when I started. Now I realize I could've done just as well on my own. There are many free resources out there, and many great books. The books can get a little pricey, but for $60+ you can get as much or more than you would pay for in a $2,000 seminar. Having said that, I'm also very selective in choosing books and I am perfectly capable of learning a lot from a book (some people aren't). Combine all that with a ton of screen time and the beginner is well on his/her way.


st said...

Nice post Dr Steenbarger. A couple things I've noticed in my learning curve in trading as well as in my "day job".

1) Good and longterm mentoring in trading is hard to find. In my "day job" mentoring lasts for years and occurs with multiple different people. Getting similar feedback tweaked a bit differently from several different people has given me a more robust learning atmosphere in my "day job". My learning curve in trading has been much more prolonged because mentoring has been less intense, less longterm, and less varied.

2) I think simulations are useful in getting some experience and getting the creative juices flowing. But the most efficient and profound learning that sticks with me long term occurs when there is at least something at stake. I find reduced position sizing to be the best way for me to really learn how to trade a certain product and strategy, assuming that an appropriate amount of research and development has occurred beforehand.

3) I often think that all the different information sources available are actually counter productive to learning how to trade. Better to start with one focused viewpoint and learn it very well, rather than try to absorb as much varied information as possible. For that reason I would not recommend new traders start reading the wsj, barrons, etc. It's too unfocused for a new learner, and will confuse them with too many differing inputs.

Keep up the good work. Your most recent book was fantastic.

Brett Steenbarger, Ph.D. said...

Hi Kathy,

Very good point. Making a living from one's performances is a long-term goal for traders, as it is for golfers, actors, and musicians.


Brett Steenbarger, Ph.D. said...

Hi Brandon,

Great comments. I'd add the value of networking with colleagues. It's amazing how much can be learned by sharing mutual expertise.


Brett Steenbarger, Ph.D. said...

Hi ST,

Great points; thanks. I think you have an especially important point re: the importance of an intense, varied learning curve. Many traders never hit a proper threshold of intensity or variation and stay in ruts.


Tom said...

I am going through this learning process right now so this is very relevant to me. What I have found helpful is the following:

1. Read, read and read some more. I am using Van. K Tharp and Dr. Alexander Elder's books to help guide me. Reading blogs like yours and others you mentioned are essential. I also read WSJ and Barrons. Information overload is a HUGE issue for me as I try to learn. This and time management are my biggest obstacles.

2. Develop a trading business plan, including your goals, risk management (position sizing), trading rules and forecast your P&L 2 years out. Be conservative in your estimates and expectations. Have adequate capital and reserves in place!

3. Spend time learning the software you are going to use and your trading platform. Simulated trading is essential just to understand various order types and how a trade gets executed or fails. Keep it simple. Don't get caught up in all the tools out there.

4. Stay on top of the economy, the markets and develop a watch lists of stocks. I track 15+ portfolios (sectors, baskets and ETF components) which includes 500+ stocks. At the end of every market day I do a full review of each portfolio to see what stocks were rising/falling the most and why. This helps me keep on top of sector/market trends. As I see or hear about new trends or stocks, I add new portfolios to track them.

5. If you watch Bloomberg TV, CNBC, FastMoney, etc do it after market hours (I record shows on DVR). That way I can ffwd through the commercials and not interrupt my daytime focus on learning. At some point I suppose I will be able to have the TV going at the same time as I am trading, but right now its too big of a distraction.

6. It takes time, lots of time to get really comfortable. I am already 3 months into this as a full-time effort (after spending the prior 9 months just "observing" the markets while I had a full-time job).

Lastly, I always remind myself of rule #1 in trading...Don't Lose Money.