Saturday, September 06, 2008

An Introduction to Trading: Developing a Conceptual Framework

When someone wants to learn how to trade, where do they start? What markets should they focus on? What setups or patterns should they consider trading? How much risk should they take in their trades?

All of these are common first questions, and all of them are the wrong initial questions.

Learning how to trade begins with a conceptual framework: an understanding of how and why markets move and how and why they are related to one another.

When scientists undertake experiments, they don't throw all sorts of things at the wall to see what sticks. They begin with a theory--a tentative explanation of their observations--and then use that theory to guide the genesis and testing of hypotheses. "There is nothing so practical as a good theory," psychologist Kurt Lewin once remarked. The theory organizes thought; it helps us focus on what is important and eliminate what is irrelevant.

Psychologists operate with their theoretical, conceptual frameworks as well. The psychoanalytic perspective initially pioneered by Freud; the cognitive-behavioral approaches derived from learning research: these are ways of making sense of people and their patterns. The value of such frameworks is in their ability to help guide psychologists and their clients understand and address problems in new ways.

Too often traders begin learning markets by trying to learn patterns that they can trade. Without the scientist's grounding in observation and theory, such traders end up risking their money without truly understanding what they're doing and how it fits into the larger picture of supply and demand in their markets. No wonder these traders have difficulty sustaining confidence and discipline: if you don't grasp why you're doing something, it's hard to do it with conviction.

In these posts devoted to "An Introduction to Trading" we'll begin with a conceptual framework, so that you can understand *why* and *how* markets move. From that framework, we'll then explore practice: how to identify regions of greater and lesser opportunity. The framework that these posts will build is hardly the only perspective out there; nor is it necessarily the best for all people. Rather, it's a view that I have found quite helpful in 30+ years of trading markets and coaching traders. Your job over time is to extract what you find useful in this perspective and integrate it with your own observations and ideas.

When journeying to a new destination, it helps to have a map. A conceptual framework is a mental map: a view of the trader's territory. Don't be so quick to get to the destination that you trade without understanding and leave yourself confused and frustrated. Markets will always be there; opportunity changes, but never goes away. Now is the time to build your map and chart your course. Let's begin that process with the next post.


Resources for Learning How to Trade