Friday, February 01, 2008

From Trader Education to Trader Training: A Trading Curriculum

In my recent post, I noted three research conclusions about expertise that suggested that elite levels of performance typically require ongoing, structured training. We see this among Olympic athletes, physicians, soldiers, chess players, and musicians. Nonetheless, offerings in trader education typically consist of one-off seminars, books, magazine articles, or Web posts. Missing is the notion of curriculum: a planned process for bringing beginners to competence and competent traders to expertise.

Let's take a look at a medical school curriculum to explore what a true program for trader training might look like. The education of a medical student typically progresses through several phases:

1) Developing a Fund of Information - The beginning medical student is immersed in anatomy, physiology, biochemistry, and the like. The idea behind this is that it is not enough to know which treatments go with which illnesses: you need to understand why this is so. The fund of information helps physicians reason their way through illnesses they may not have seen before or that may have an unusual presentation. Similarly, a trader's education should not begin with indications of when to buy or sell. It should be grounded in an understanding of markets and how markets work. This means understanding the participants in the markets, from the market makers and other liquidity providers--and their activity around the bid and offer--to the hedge funds, mutual funds, investment banks, and sovereign wealth funds that exploit longer-term trends and intermarket relationships. What is program trading? What is arbitrage? How can you identify markets dominated by market makers vs. longer-term institutional participants? How do markets overseas affect our market and vice versa? How do currency and fixed income markets affect stocks; how do they affect each other; and how are all related to economic activity here and abroad? A physician *can* treat a person without understanding the intricacies of the human body, and a trader *can* trade in ignorance of supply/demand and global markets. In ambiguous situations, however, it's the well-versed doctor or trader who can best make sense of situations and act constructively.

2) Observational Learning - The next phase of education for a medical student is observational. They watch resident physicians and experienced attending physicians perform histories and physicals; they observe in the hospital by walking with doctors on rounds and learning from specific patient cases. They may assist with treatment in small ways, but their major role is to learn through immersion. Similarly, the trader who is training can benefit from watching experienced traders at their craft. You can learn from their mistakes and their strengths, and you especially learn by observing different traders doing different things. Online trading rooms, where a mentor will follow markets with attendees, are very helpful for such observational learning. Very often, the inspiration of someone you watch provides the first role model that helps you decide how you are going to tackle your profession. In medicine, much of this observation occurs during multi-week "rotations" through various medical services: internal medicine, surgery, family medicine, pediatrics, psychiatry, and the like. A trader who observes multiple markets and trading styles is most apt to figure out his or her own niche.

3) Supervised Practice - Much of the third year of medical school is observational, with increasing (though limited) participation in the treatment process over the course of the year. By the fourth year, medical students take responsibility for specific patients under the close supervision of junior and senior residents, as well as attending physicians. Observational learning continues, but the senior (fourth-year) student now also has responsibility for helping teach the beginning observational learners from the third year. During acting internships (AIs), fourth year students take on even greater responsibility, testing out what it is like to be a beginning level resident physician. Over the course of the fourth year, the decision of a medical specialty crystallizes, as the student has received feedback--from instructors and experience--regarding strengths and weaknesses. Similarly, among traders structured practice in different markets provides the feedback and experience to identify a trading niche. As I emphasized in my book, the use of trading simulators (mock trading with real market data) is particularly helpful in this regard. Simulation platforms such as Ninja Trader also enable practicing traders to gather data on their winning and losing trades, so that they can immediately see what they're doing right and wrong. This deliberate practice is a hallmark of all expertise development. Here is where an experienced, knowledgeable coach/mentor can be particularly helpful: as one who can help make sense out of the performance data, make suggestions for improvement, and help the developing trader set goals that sustain the learning curve.

4) Consultative Practice - Once the student finishes four years of medical school, he or she has an M.D. degree, but cannot practice medicine. The residency, which typically lasts three or more years, is a period of specialization and intensive learning by doing. Resident physicians take primary responsibility for their own patients, but operate with a high degree of consultation with more senior residents and with attending physicians. Whereas the first four years provided a fund of information and a knowledge of general medical practice, the residency period moves students forward in expertise development in their chosen specialty. This is where they learn the information and skills specific to fields such as surgery or psychiatry. Residents often teach medical students, but also participate in case conferences, seminars, and "grand rounds" sessions themselves to further their education. A great deal of learning is at the bedside, seeing as many different kinds of cases and participating in as many different procedures as possible. For the trader, this is where participation in a virtual trading group (an online association of serious traders) or in an actual proprietary trading group (or other trading setting) can be valuable. It is also where the education provided by investment banks is most valuable, as new traders learn from their senior counterparts at a desk and gradually take on increased levels of responsibility. Simulated trading may still be helpful, but at this consultative phase of learning, it's important to put on real positions using the real strategies that have been observed and tried out in practice. The consultative part is crucial: having mechanisms for obtaining feedback about trading processes and results. Software packages that provide comprehensive trader metrics, such as Trader DNA, are very helpful in this regard and coaching/mentoring can be quite useful--particularly when the coach is experienced in the specific kind of trading you're undertaking. Many traders develop personal and professional relationships with peer traders online that serve the important consultative function. The important thing at this phase is to trade as many different market conditions and strategies as possible to hone skills and identify strengths.

Only after four years of medical school and many years of residency (and sometimes sub-specialty training as well), is the physician considered to be sufficiently expert for board certification in a specialty and independent practice. This is a recognition that expertise develops over many years of dedicated effort. Similarly, I would not want a trader to be managing my money until he or she had a similar level of experience and a track record of growing success to document expertise.

I have drawn the parallels between medical training and the training of traders to illustrate how far the trading field is from any kind of professionalization. Only in such a vacuum is it possible for huckster "gurus" to offer their promises of quick riches at seminars, backed by the support of vendors who don't care whether their products and services are utilized responsibly or not. We are not yet at the point where enlightened trading organizations (the big leagues) develop farm team organizations or comprehensive training programs for cultivating talent. Instead, we let traders go at it themselves and accept that 1 in a thousand will survive the Darwinian selection process. I offer this post as a vision for a different way to approach trading and the development of traders. It will take visionary and out-of-the-box thinking to make such training economically viable as well as practically effective.


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