Thursday, August 02, 2007

Five Steps Toward Becoming Your Own Trading Coach

Let's face it: the average beginning trader can't afford a dedicated trading coach, and what passes for trading education lacks the structure and continuity of effective coaching. This creates a special challenge for the developing trader: the need to simultaneously be both student and coach, guiding one's own learning process.

This may seem impossible, but in fact--as I point out in my book--there are many such precedents for self-training. These include the training of many jazz musicians, chess players, and--yes--successful short-term traders at proprietary trading firms. The common element behind all of these is that performance events are frequent, with rapid feedback. This combination accelerates the learning curve, as the performer squeezes years of experience into months of concentrated effort.

So what does it mean to coach oneself in trading? Five elements come readily to mind:

1) Developing a Framework for Thinking About Markets - The successful traders I've known and worked with have developed their own ways of thinking about markets, supply and demand, intermarket relationships, and the like. This framework helps them understand why markets do what they do; they are conceptual lenses through which traders interpret market action. My own framework has developed from an appreciation of Market Profile theory and concrete experience working with various groups of market participants: retail, market makers, investors, etc. That framework sensitizes me to the market behavior of the largest participants, seeking clues from their behavior as to likely near-term price movement.

2) Developing a Way of Translating One's Framework Into Concrete Market Terms - A framework for thinking about markets is useless unless it organizes actual market data in actionable ways that provide a potential trading edge. My own framework leads me to organize recent market action into value areas and relevant trading ranges, looking for auction behavior (buying at offer, selling at bid) as we approach those ranges to handicap the odds of breakouts or returns to value. I find an understanding of those auction dynamics helpful to entries (entering positions near range extremes after buying/selling have shown evidence of waning or expanding); stops (basing stops on market dynamics, not just price action); and exits (setting profit targets at high probability pivot points, range midpoints, support/resistance, etc.)

3) Establishing a Routine for Practicing Market Understanding and Translating That Understanding Into Action - A trader recently gave me the excellent book "The Art of Learning" by Josh Waitzkin, the childhood chess prodigy who went on to become a master of Tai Chi. The book is not about trading, but it is extremely relevant to developing expertise in any field--including trading. Waitzkin emphasizes the role of immersion in the learning process and the training of intuition. Just as chessmasters learn the game through intensive review and observation, as well as play, traders can apply their market understanding by immersing themselves in the trading process. For me this means knowing where value is located at different time frames, where we find the edges of trading ranges, and how correlated markets are behaving as we attempt to shift value areas. (See my Twitter comments for examples). In practice, I require myself to make trades at the edges of any identified trading ranges to process market data and anticipate whether we're going to break out or return to the range midpoint (or beyond). Practicing such exercises day after day builds one's ability to "feel" market action and recognize trading patterns.

4) Gathering Feedback and Setting Goals - It's not enough to practice; coaches also provide feedback to students about their performance, praising progress and identifying areas where further development is needed. Breaking down trades into components (execution/entry, money management/stops, exits) makes it easier to identify strengths and weaknesses and to set goals for improvement. Much of the talent of a coach is making the learning process fun as well as challenging, keeping goals difficult, but reachable. Keeping score with performance metrics (P/L, average size of wins/losses, drawdowns, etc.) is a great way to engage the competitive drive in the service of learning and development. Journals are excellent tools for documenting one's learning, reviewing lessons, and cementing goals.

5) Developing Self Control - Research suggests that it is the state of mind that we're in during rehearsal--focused or distracted, open-minded or anxious--that dictates the quality of our learning. Because so much of the expertise of the performer resides at an implicit, intuitive level, any interference from negative self-talk, physical discomfort, or efforts to consciously control what should come naturally will necessarily interfere with performance. A coach does not only provide drills and teaching, but teaches the skills needed to achieve the concentration required for effective learning. Many "trading coaches" focus almost exclusively on this element, failing to appreciate that development always occurs in the context of performance.

In sum, becoming your own trading coach means structuring your learning experience, so that you become capable of deep levels of knowing and doing. In future posts, I plan to illustrate this self-coaching process in greater detail.


Josh Waitzkin video on The Art of Learning

Becoming Your Own Trading Coach

How Can I Learn Trading?

What Brett Listened to While Writing This Post