The Tactical Trader - Learning To Day Trade

• the four steps of learning applied to trading

• learning progression

• trader created learning problems

The Four Stages of Learning

Learning is a process involving various stages that must be completed.  AND they must be completed - just like you cannot put the roof on a house before your pour the foundation and build the walls - there are no shortcuts to learning, and ESPECIALLY no shortcuts in learning to trade. 

• Unconscious Incompetence:  you don't know what you don't know

• Conscious Incompetence:  you know that you don't know how

• Conscious Competence:  you know how - if you really think about it

• Unconscious Competence:  you know how AND you do it - instinctively

Unconscious Incompetence

This is the first stage of learning - this is blissful ignorance.

Actually we have been confronted with this all of our lives - the process of learning AND not having any idea about how little we knew or needed to know about what we were trying to learn.  BUT we have forgotten how the learning process really evolved, for instance, can you remember learning to tie your shoes OR learning how to read.  We don't remember the teachers AND we don't remember the time it took.  Now as accomplished adults, our egos make us want to do everything for ourselves AND we are very impatient, wanting everything to happen immediately.

• the trader has no idea what is involved AND no idea of how little they know

• the trader has no trading plan - they don't know that they need one

• AND the trader certainly has no concept of trading psychology OR the impact that this is almost assuredly going to have on their attempts at trading

Conscious Incompetence

The trader is excited about the vast potential of trading - especially after seeing another magazine advertisement for the trading system that only takes 10 minutes a day to makes 1000s of dollars.  They subscribe to a charting service AND they open a brokerage account.  They do realize that they need to learn a little bit about trading before they begin, so they ask their broker what to do, they read a trading book or two, they subscribe to a news letter AND NOW they are ready to begin trading.

• the trader loses AND realizes how what they thought would give them the necessary knowledge needed to trade was of virtually no use

• AND the trader now becomes impacted by trading psychology AND the emotions/fears involved with attempting to do something that they don't understand and can't control - AND is costing them their money as well

Conscious Incompetence is supposed to be the second step in learning AND in the typical learning process it would be, as the 'learner' transitions from knowing nothing and not being aware of it, to experimenting with trial and error as they practice and gain experience.  They haven't yet learned, and they haven't yet gained the ability - BUT they are learning.

HOWEVER in the case of trading, has learning even begun OR instead, was learning replaced with a rush to begin trading and start gaining the profits that enamored the trader in the first place.  As well, the trading learning process is often circumvented with negativity from having difficulties and losses; the trader develops judgments about trading, like trading is too hard for them to learn OR that they are too stupid to trade. 

Now, instead of accepting that learning is an extended process of which losing and making mistakes is a normal part of that process, the trader is confused AND the trader is afraid.  The trader had no plan before beginning to trade; they didn’t know, or they didn’t accept that they needed one. 

AND this is where it typically ends for most traders.  Instead of profiting, they are quickly losing the money in their trading account.  They can't afford to keep trading AND even if they can afford the monetary losses, they can't afford the psychological losses – the pain that trading is causing.  

WHY is this - WHY aren't otherwise successful people also successful as traders - WHY is it said:

"The largest group of consistent losers is composed primarily of doctors, lawyers, engineers, scientists, CEOs, wealthy retirees, and entrepreneurs,  Furthermore, most of the industry's best market analysts are the worst traders imaginable."

"Trading is more than technical indicators, patterns, and support or resistance.  Trading is psychological.  Only the traders who have worked through those issues have been consistently successful in their trades.  Trading inconsistency, misreading market direction, fear, frustration, hopelessness, and 'giving it back' after several successful trades are all symptoms of improper or dysfunctional thinking."   

"Without a sound trading psychology there is usually little chance of repeated and consistent success.  BUT you can overcome fear, anxiousness, confusion, frustration and feelings of hopelessness.  You can trade effectively and profitably when you can think and act without self-destructive emotions and behaviors."

“I think good trading is much more a psychological problem then it is methodological.  I think that what happens is that fear takes over.  And whenever a trader is trading from fear, we are absolutely, from a psychological standpoint, going to be the most consistent traders ever.  The only problem is that we buy the tops and sell the bottoms.  We do exactly the wrong thing when we’re coming from a fearful state of mind.”  

Conscious Competence

IF the trader has survived the conscious incompetence stage of learning, they have done so because before it was able to ruin any chance of them becoming a profitable trader, they have been made aware of AND have accepted a number of concepts: 

• they have accepted that learning to trade is a marathon – not a sprint

• they have accepted that all their previous successes AND life's experiences do not equate to trading success

• they have accepted that intelligence OR wealth does not equate to trading success

• they have accepted that they cannot control the markets AND they have also accepted that they don't need to control the markets in order to profitably trade

• they have accepted that learning to trade is going to be a long extended process that has no short cuts

• they have accepted the need to have a trading plan AND to not trade real money before they can profitably paper trade and implement their plan

• they have accepted the need to become methodologically AND psychologically prepared to trade

The conscious competence stage of learning is a multi-level stage, where the trader first develops a trading plan that they learn to trade profitably, and continues as the trader gains additional levels of competence and becomes able to trade real money profitably.

 Level 1

• the trader has developed a plan AND establishes what will become their 'core' trade setups

• the trader continues to study AND make adjustments to the 'core' setups

• the trader begins to paper trade

• the trader can see what works AND begins to understand why something doesn't work

• the trader doesn't start a new plan every time things don't work

Level 2

• the trader continues to increase screen time leading to increase recognition AND repetition

• the trader continues to develop experience AND consistency

• the trader is profitably paper trading

Level 3

• the trader begins to trade real money

• the trader accepts that losing is a part of trading

• the trader accepts that the outcome may be unknown BUT how they act once in a trade can be known

• the trader is able to control their emotions and fears

Level 4

• the trader is thinking trade

• the trader understands odds

• the trader differentiates and filters for market conditions

• the trader is able to extend the size of their partial profits

• the trader is able to hold their trades for a greater percentage of the trading swing

• the trader adds additional setups to their 'core' setups

• the trader is profitably real money trading 

Unconscious Competence

Trading has become a learned skill, where the trader can timely recognize the various setups that they have decided to trade, without reviewing all the components of their plan – they implement their plan as a natural process, reacting to their setups as they occur.

• the trader has developed intuition from their experience

• the trader puts on trades without hesitation

• the trader has a 'check list' to deal with problem trading periods

• the trader is able to accept consecutive losses

• the trader is comfortable with adding on to winning trades

• the trader is comfortable trading multiple markets

• the trader is trading for a living

Learning Progression

Trader A:  I would like to inquire if your service would be appropriate for me.  I want to become a self sufficient trader, but until that time comes I need a service that will provide signals in a timely fashion that will allow subscribers to book the trades in a time frame that will allow for profits.  The following is my situation:

• New to Trading

• Have some finance knowledge ( Business Degree, Professional Accounting Designation, 2 levels of the CFA Program)

• Need to make a living from trading pulling profits out of the market every 2 weeks to cover living expenses

What I am saying is that I need to follow blindly booking signals for right now.  But if appropriate stay with your service for up to a year studying and learning (your site and other sources as well ).  I need to be profitable now and take my time to learn, can I do this with your service?

Where Are You In The Learning Process

Understanding where you are in the learning process, and having a plan for moving from stage to stage, as well as through the various levels inside a given state, is critical to the progression of learning – this is an important component of the overall trading plan.  The learning process for most traders stop in between the stage of conscious incompetence and level 2 of the conscious competence stage – the trader eventually becomes profitable paper trading BUT they don't become profitable trading real money. 

This is where the tremendous interrelation between method and psychology becomes extremely evident as the trader develops methodologically, but they haven't also developed psychologically.  After profitable paper trading is followed by losses from the initial attempts at real money trading, the trader doesn't know how to deal with this situation and can't go further through the stage and the learning process.  This remains the biggest reason I continue to ‘push’ traders AND especially paper traders to trade their plan in the chatroom, because I know that doing this where everyone else in the room is watching you AND you feel second guessing you, is the one available way to add and start dealing with emotion as part of the learning process.

Trader Created Problems Learning

There are numerous problems involved with learning to trade that are different from other things that we have learned to do AND I don’t think there is a complete analogy that we have experience with that can explain what is involved OR what the learning trader is going to have to go through to become profitable. 

Most analogies are sports analogies, like the best batters in baseball still fail almost 70% of this time, as we are trying to learn to accept losing being part of trading.  And I am sure that slicing golf ball after golf back far into the rough, while being in a foursome where the other three golfers are strangers with 3 handicaps, is very difficult psychologically as you can ‘feel’ them laughing at every shot you take. 

But none of these analogies include losing money each time you fail, let alone letting yourself do it in thirty seconds three trades in a row AND still know that you have to take the next trade; I really can think of nothing in our life experiences that has prepared us for this kind of outcome – AND new traders, regardless of wealth or capabilities in other endeavors, quickly are confronted with the following as they try to skip through the learning process.

• that there are almost overwhelming odds against ever becoming a profitable trader – letting ego tell you that you are going to be different, simply because you have always been able to do anything that you have tried

• the trader has unrealistic expectations about the time required and the learning curve involved – thinking they can immediately trade real money without trading experience or a tested trading plan

• the trader is continuously looking for something new – the ‘latest and greatest’ or the ‘holy grail’ – never allowing themselves to learn a single plan and let it evolve over time to gain consistency

• the trader doesn’t understand the impact psychology is going to have on their trading AND although you can practice method – there are very few ways to practice method AND psychology

• the trader is under capitalized and doesn’t understand the impact the fear of losing is going to have on them

Method is tremendously important to trading, you just are not going to be able to be profitable trading a method that is not inherently profitable – for instance, trying to continually buy the bottom in a strong and continually deteriorating down move.  However, just because your method is to trade with this strong move, this does not mean that your psychology will allow you to take the involved trades, or stay in the trades that you have taken when there is a retrace against the move.

Again, I cannot picture a trader profitably trading real money without profitably paper trading first – AND actually I cannot picture a trader even profitably paper trading without a trading plan, however many traders for a variety of reasons insist on doing just this – beginning to trade with real money without a tested trading plan.  When I have asked traders why they would do this AND whether they thought it was necessary to paper trade, I received some of the following answers.

Wealthy Trader:  “Ultimately, having your own money on the line under live market conditions where exact fills/profits/losses are known is the arbiter of success.  An individual of high net worth may bypass the paper trade stage and begin with 1-2 lots on the e-mini.”

Ego Trader:  “Who needs to paper trade - you can't make any money paper trading - paper trading is for sissies - take the damn trade and manage it.”

Gambler Trader:  a Las Vegas mentality where you are willing to throw away $X for a roll of the dice AND the thrill of maybe hitting the jackpot.  OR how about an opinion on a news release - I think the fomc is going to lower interest rates AND that will make the market go up so I am going to go long into the announcement.

Job Replacement Trader:  “I know I need to spend the time making a trading plan and paper trading it but I can’t, I got laid off from my job and need to trade now to make some money.”

Trader B:  I was cleaning up my work area this evening, and throwing out some old "chart work" from Jan-Feb-March, WHEW it's no wonder I was getting beat up compared to what I'm doing now…I had to be OUT OF MY MIND trading like that.  I hope i can look back in another 4-5 months and have made as much progress as i think I've made since the beginning of this year.  Looking at my old chart work, all I was trying to do was reverse on every pullback…pretty scary.

Copyright © 2005 Tactical Trading, LLC. All rights reserved.
Reproduction in whole or in part without permission is prohibited.