One of the fascinating conclusions of the research I posted yesterday is that traders learn by trading; that it is the number of trades placed--not the amount of time spent trading--that best predicts success in markets. That same research, however, finds that there is a very high attrition rate among traders; the most common learning that occurs in markets, quite literally, is that traders find out that they can't make money at what they're doing.
So we have a catch: traders need to learn by trading, but they also need to preserve their capital as they traverse their learning curves.
As I stressed in the Trader Performance book, much of learning in trading is pattern recognition. If that is the case, than it may be the frequency and intensity of exposure to patterns--and not the trading itself--that facilitates learning. This very much fits with my experience that traders can accelerate the development of competence by engaging in simulated trading (with live data) and by reviewing their trading via video. "Any techniques that you use in trading--whether for money management, self-control, or pattern recognition--require frequent repetition before they will become an ongoing part of your repertoire" (Psychology of Trading, p. 154).
Traders drop out of markets, perhaps not because they lack talent, but because they fail to achieve the necessary repetitions to internalize skills prior to depleting their capital.
They also fail because, even with repeated trading, they do not have a system for reviewing their performance, setting goals for improvement, intensively working on goals, and holding themselves accountable for those. Instead of a week's worth of experience, they repeat a single day's learning five times over.
The research cited yesterday, as well as this interesting study, suggest that an important component of learning to trade is learning to avoid behavioral biases in taking profits and losses. The traders who lose their disposition to sell winners early and hold onto losers are those that tend to be most successful. Ironically, turning loss-taking into routine behavior may be one of the most important learned skills in the evolution of a trader's success. The key is staying small enough, long enough to learn from the experience of losing.
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4 comments:
Its similar to golf- you can learn alot by reading Golf Digest and watching and listening to others. To really be a good golfer though, you have to keep repeating your swing. Tiger probably takes several hundred swings a day to create that muscle memory. Practicing trading with nominal size creates that same "brain muscle memory"
but at $14/roundtrip, fees make losing an increasingly difficult proposition, especially if you consider keeping your position sizing down to decrease your total exposure.
I think the article is accurate. I am a new trader in general. I began simulated trading in forex at the beginning of July and did so until the beginning of October. At the beginning of October I began trading a Live account. I got burned on the day that the AUD/USD lost 10cents within one and a half trading sessions, BUT I didn’t get too burned because I knew to not have too huge a position size per trade. BUT having said that I still encountered rather severe draw down on my account but I didn’t follow my rules very well during that period and it was practically my second day trading so I was excited and somewhat greedy. (not my normal trading style when trading with the simulated account)
Oh how things change. I changed my position size from 2% per trade to 2% maximum loss exposure for the ENTIRE day. Actually it’s more like 1% now. If I lose more than 1% for the day then that’s it I’m out of it for the remainder of the day.
So far for the last week or two I’ve been able to gain on average approx 2% per day on my total capital or about 10% in the black per week. I’m happy at the moment but in currency (I’m a scalper—generally speaking), I’m finding that you need to have multiple setups for different phases. E.g. A setup for when the market moves quickly or when it moves slowly. A setup for the size of the moves over the time frame that you trade. I like to look not just at patterns but at how the market moves. If the price is really choppy—i.e. it moves up sharply and then immediately moves down making new lows, just as sharply and continues this process then I leave the market alone and do something else. I don’t like that kind of price action. The only solution I’ve come up with to nullify that situation somewhat is to move to a higher time frame.
So yeah, I agree that simulated trading is extremely important. I think that it is needed in forex because the market changes so much. One minute it is like watching paint dry and the next it drops 1000pips.
So in summary I’m finding that as a new trader it is better to not lose more than 1-2%per day when trading with a live account because it gets you used to trading and you can learn from your mistakes.
Also when I trade I always ask myself (watching my mind), why I feel reluctance to terminate a trade that I think is going to go bad on me. I always ask why I’m so greedy to hold on to a potential loser like that. Slowly I think that I am re-conditioning my mind to accept taking losses and to hold on to winners a little longer. I will also stress that I am finding that it is useful to accept what the market gives you. If you are scalping and you are in a position to take profit and you see that the quotes move steadily lower then up a little then lower again…you might as well NOT be greedy in that situation and take the profit at that point and re-enter on a dip OR get ready to trade in the opposite direction.
I’m also doing weird experiments where I randomly enter a trade and then play a game with myself as to when to exit. Exiting is the key to a lot of the problems out there I think and that’s something that I want to improve on.
Anyway it’s late here so I thought I’d share some rambling before I go to sleep :)
I have just humble, amateur interests in psychology, and Dr. Brett might add a professional comment on this, but I think that trading (and any other field that deals with information) boils down to 2 critical psychological (cognitive) skills: 1) How we perceive information and 2) How we interpret information (decision making). Those two skills blend, interact and influence the key trading skills. Trading isn’t easy because one has to find and employ their best combination of those two cognitive skills that would enhance the trading skills. In addition, a proper structured learning has to be applied to that combination of skills. I don’t know if there is a universal way to learn (e.g. learning by trading), but I know from my experience that it might be useful to try different types of practice until a proper match between cognitive skills and practice is achieved. Final thoughts – perhaps, that blend of the two cognitive skills determines if one is to be a trader (day trader, swing trader, etc.) or investor (short term, long term).
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