Tuesday, September 23, 2008

Introduction to Trading: Learning How to Trade

Where most efforts at trading education have failed is in their lack of development of a coherent curriculum. Piecemeal presentations of market patterns or indicators doesn't provide the concrete skills needed to generate trade ideas, effectively execute those ideas, and then manage positions as they trade. If we look at the curricula at medical schools, for example, we find several core components:

1) Information - Beginning medical students are immersed in basic sciences to develop a fund of information regarding the body and its health and illness. A competent physician is not just one who knows what to do, but also why to do it. This deep level of knowledge is important when it becomes necessary to make difficult differential diagnoses or to manage unusual reactions and complications following treatment. After all, you wouldn't want a surgeon operating on you if he or she hadn't been grounded in anatomy and physiology. Similarly, traders need to be grounded in the basics of their profession: how markets work, how markets affect one another and are affected by news and sentiment, how positions in market can be expressed across different markets, how risk is managed, etc. Someone who manages a personal portfolio or trades an account without such information is not so different from that surgeon who lacks knowledge of anatomy and physiology.

2) Observation - "See one, do one, teach one" is a mantra in medical education. Before a student treats patients, he or she shadows senior medical students, residents, and attending physicians to gain exposure to different specialty areas of medical practice. In my book Enhancing Trader Performance, I explain how pattern recognition lies at the heart of trading: it is necessary to observe and internalize those patterns before one develops a "feel" for them that can aid trading decisions. Observing markets in different conditions and observing traders tackle markets via online trading rooms is invaluable in bringing knowledge to life.

3) Simulation - Students practice their ability to take a history and physical by working with simulated patients before they actually go onto the hospital floors or into the clinics. They work on cadavers before they perform surgical procedures on live patients. They also follow patients under the very close supervision of senior colleagues, so that they can practice decision-making under safe conditions. Much of the second half of medical education is a learning by doing in progressively realistic, independent situations. Similarly, traders can begin learning how to enter and manage positions by practicing their skills on a simulation platform before putting their capital at risk--and by trading very small size before tackling larger risk.

4) Supervised Practice - Eventually medical students need to work on live patients and eventually they need to be responsible for their own patients. At each level of education, however, there is supervision and consultation, so that mistakes can be detected and avoided and risk to patients can be minimized. After the first four years of medical education are completed, there is a supervised process of practice called residency, in which the skills specific to a specialty area are developed. This typically lasts another three or four years. A student is not deemed ready to be a board-certified specialist until there have been many years of increasingly independent practice. Trading is no different: there are skills specific to specialized markets and trading styles; mentorship requires guidance from those who are steeped in each specialty area (scalping, portfolio management, market making, options, currencies, etc.).

Many of the problems traders experience in markets is the result of trying to short-circuit this learning process. Many times, this short-circuiting is the result of education vendors who know nothing of research/practice in education and curricular design. The challenge for new and developing traders is to locate and utilize the resources they need to structure their own learning processes. One goal of this "Introduction to Trading" e-book, as well as the book on self-coaching, is to help traders with this process.


David L. Spurr said...

Great Comments Brett. I've had worked in the Financial Services field for over 20 years and just recently got out. I feel that in this environment you need to have a trading psychology to succeed. The MPT, buy and hold, keep your head down and things will work out OK is a myth, created by Wall St. to justify their own means (creating profits). So many individuals are at risk of losing significant amounts of money, mainly because they believe what they've been told. I enjoy reading your posts as they will help to create better traders. Your efforts will help to pull the mainstream into understanding what technical analysis and trading is really all about. It's not just about Fundamentals. I'm working on a trading blog as well and would encourage you to check it out when you have a chance; http://displacedema.blogspot.com

Thanks again.

Club STC said...

Hi Brett

Great post summarising what is needed to succeed. Only one problem as see it. The program needs to be a full mentor course running say over 18 month to 24 months.

That being the case, how many student-traders would be willing to bear the cost of the training?


SSK said...

HELLO BRETT, VERY INSIGHTFULL COMMENTARY, Simulation is the key after you have accomplished the other things you mentioned. I have traded real money for yrs, but never learned how to learn correctly, you hit the nail on the head. I have tried to tell others that simulation is the one of the best and basic exercises one can do in understanding how emotion, and decision making interacts with trading, and most do not see the correlation between the valuable experience gained in simulation, and then being able to preform the same when they go live. From someone who has now done both, I can say from experience, that simulation gives you the ability to understand emotions that are realized due to the exectution of failed or succsessful stategys throughout the simulation process. When you trade live without those simulated experiences, you dont have the time to understand how emotions play a part in your strategy's deployment, you build negative metal patterns, hence the trader never really unlearns the bad pratices and replace's them with good ones, all they say is "I have to work on my emotions!", those comments come mostly from folks that have not achieved succsess in there trading, no suprise to you, but none the less a paradox from the view point that somehow, real trading experience from their view point is discounted due to the lack of emotions! They just dont get it! I gave up trying to get those that hold on to that misnomer, as the markets need those types of players to provide liquidity, thanks for all you do in helping those that arent hard wired in progressing in learning. Best, SSK.

Gary said...

Hi Brett,

Longtime reader, first time poster. I was wondering if you had any recommendations for good book(s) that would cover the topics you referenced in your post:

"traders need to be grounded in the basics of their profession: how markets work, how markets affect one another and are affected by news and sentiment, how positions in market can be expressed across different markets, how risk is managed, etc."

Thanks for all you do.

Brett Steenbarger, Ph.D. said...

Thanks, David, for the kind comment and the link--


Brett Steenbarger, Ph.D. said...

Hi Ray,

I do think students would need to devote time and funds to such a trading education, much as they would devote resources to education in other vocational arenas. I also think the online medium can exploit efficiencies in delivering material, illustrating skills, etc.


Brett Steenbarger, Ph.D. said...

Thanks, SSK; I have found exactly the same thing--


Brett Steenbarger, Ph.D. said...

Hi Gary,

Books by John Forman, Ray Barros, and Jim Dalton come to mind right away.