Sunday, September 28, 2014

How Can Competent Traders Become Great Traders?

A savvy reader recently asked a good question in a comment to a blog post.  He wanted to know what a competent trader--one who is capable of breaking even after expenses--most needs to do in order to become a great trader.  Should he spend more time in deliberate practice, focusing on specific skills?  That would lead him to be more active in the market and could adversely affect his profitability.  Or should he focus on his profitability, limit his number of trades, and thus have less practice time in markets?

My immediate reply is that veering away from what makes you profitable--getting away from your best practices--would not be practice.  What is most important is that your good trading actually be your practice.  That means, per the recent post, that you dissect your performance and identify precisely what you are doing well (so that you can replicate it) and what you could do better (so that you can improve upon it).  The key here is turning your observations regarding strengths and weaknesses into specific plans and goals that become actionable in subsequent trading.  That is what turns mere review into deliberate practice.  It also means that your best trading becomes your best practice.

Now suppose you want to try something new in your trading.  In that situation, it can be very helpful to return to simulation mode outside of trading hours and rehearse how your idea would play out in a moving market.  I recently came up with an idea for an entry pattern that was unique.  I spent the better part of a weekend morning reviewing past markets and seeing how the pattern played out over the past couple of years.  That helped me refine the pattern considerably and now I'll be ready to try it out in real time with a one or two lot.  Crawl-walk-run.  Turn the trading into practice, but don't allow practice to interfere with profitability. Simulation mode provides all the experience with none of the risk.  You can always add the risk element by trading the new ideas in small size.

To sum up, more trading is not necessarily more practice.  Indeed, more trading can instill bad practices.  And more time in front of screens is not necessarily more practice.  Deliberate practice means doing, obtaining feedback on results, and then correcting performance.  If you're a competent trader wanting to become a great trader, you need to identify what you already do greatly and leverage that into more consistent success.  Once you're consistently profitable, your further financial success may well come from managing more capital, not from continually tinkering with your trading.

Further Reading:  What Makes an Expert?