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?