Investor, trader, player. Greed is bad

Skill levels

Unconscious incompetence

The ancient Greeks said:

The beginning is half of everything.

Indeed, the importance of starting in any business can hardly be overestimated, and trading is no exception. Let’s try to figure out what these first steps should be.

From personal experience – I am a private trader in the Forex – I will say this: the first step should start with the truth. In the first place, you should put the correspondence of the chosen type of activity (in our case, trading) to your personality, your character. If we are going to engage in trading professionally (at least – to earn, and not to lose money; at most – to get rich), then let’s think about whether this profession is suitable for us at all.

The question is not as simple as it seems at first glance.

This apparent simplicity (I thought a little, saw a trend, pressed the “buy” or “sell” button, opened a deal, closed a deal, withdrew a profit) is deceptive. Rarely anyone writes about the “dark side of the Moon”, about the strict requirements for the profession of a trader. Most likely, you will not see this in the advertising company. For example:

“Put a hundred dollars in the account, get a bonus, buy a trading robot and don’t worry about anything else”.

 You will not read about this in numerous self-help books on trading, with titles in the spirit of 

“How to make a million lying on the couch”

 or

“It’s easy to play on the stock exchange”.

It’s easy to play – it’s hard to earn money.

There are a great many professions in the world, but not all are suitable for you. Let’s consider for example three of them: a doctor (surgeon) and an athlete (boxer) and a sniper.

Not every one of us will be able to become a surgeon. Six years of intense study. The study of complex disciplines (Latin, etc.), anatomy lessons in the morgue. And the prospect of cutting a living person (even under anesthesia) and performing some manipulations in his body will not suit everyone. There are also adults who faint from one type of blood – and the surgeon must work for hours in a blood-filled incision… If you don’t squeeze an inconspicuous blood vessel in time, the patient will die, and the doctor will answer. In trading, it is about the same – you will not stop losses in time – the matter will end with the drain of your deposit. Your money. According to statistics, this is exactly what happens to 98% of traders, during the first three to six months of trading.

Or the craft of a boxer. With all the attractiveness of championship belts and high fees – not every person, by nature, will agree to earn a living like this. To stay in the hospital for a long time after concussions and many other injuries. Spit out broken teeth into the boxing ring. To train when you don’t want to. Continue the fight when you can hardly stand on your feet. There is something similar in trading – if a person is not ready to fight and go to the end – it is better not to start.

A sniper needs natural shooting abilities (sharp eyesight, calmness, etc.). Daily training for many years. You need to know your weapons thoroughly. By itself (psychologically), a shot at a living person is not easy and many cannot do it. Psychologically, a shot at a living person is not easy and many people cannot do it. The shooter is sometimes forced to lie for days (for example, in the snow), tracking the target, and all this for the sake of one accurate shot. Professionally engaged in trading, you will sometimes have to 

“lie down”

(waiting for entry into the market or exit from it) no less.

Having made the wrong choice of profession initially, people then regret it. Work turns into a daily torment, devouring all the time, money and nerves. God knows how many arrogant traders who dreamed of big and fast money could not earn. I have heard about trading for 20 out of 24 hours a day, when a person has no time to go to the toilet. And the results of these guys, as a rule, are not high.

They burn every day in the fire of greed, then fear. They spend long hours trying to guess where the price should go. What and to whom the price should be, we will talk more (the correct answer is to no one and nothing). Making up to 500 or more trades per day, these people eventually come to the loss of savings and burned nerves. And it’s also good if these are your savings, excess money. It is much worse when it is the last money in the family or borrowed funds. Acquaintance with collectors or bailiffs – you will not wish the enemy.

There are four levels of skill (competence):

Unconscious incompetence (amateur level)

Conscious incompetence (student level)

Conscious competence (professionalism)

Unconscious (intuitive) competence

This scheme resembles a ladder (climbing from a complete amateur to a real master) and it is applicable to almost any field of professional activity of a person. You can’t immediately get to the third or fourth floor by jumping over the first and second floors – you will inevitably fall and break. As the Russian artist Ilya Repin said:

At first, the artist draws simply and poorly.

Then it is difficult and bad.

Then it is difficult and good.

And only then it is simple and good.

It is important to understand: that being at any of the levels of professional skill we have named is not good and not bad in itself. It’s not a shame and it’s not scary. This is just a fact, the current state of affairs, a reference point. And the worst thing you can do here is try to deceive yourself. To try to appear, not to be.

For example, a five-year-old child suddenly decides to drive a car himself. With a high degree of probability, the case will end in an accident. And this does not mean that the child is underdeveloped, or the car is no good, or something is not working properly. This only means that the person has taken up the wrong business. He took on something that he can’t do yet.

Let’s briefly list the characteristic features of a person who is at the first level – “Unconscious incompetence” – in relation to trading. We repeat that there is nothing to be shy about, in itself it is not bad and not good.

So, from personal experience, I went through all this myself:

– The lack of a clear action plan for any of the possible options for the development of the market situation. A set of simple algorithms

“if… then …".

Example: a trader expects a bullish trend for EURUSD, and the market (as always – suddenly) goes down powerfully. You need to know what to do. And what not to do.

– The illusion of having any absolutely working laws on the market:

“Now it looks like the end of the third wave, which means that the price should… there is good news on unemployment in America, which means that the dollar will go up… statistics on Europe are worse than the forecast, so the euro is sure …".

 A person who has traded for at least a couple of weeks himself knows the real price of these “laws”. You can’t rely on them completely.

– Fear, based on nothing, at the exit of the trade in the “plus”. With a minimal decrease in profit, the trader recalls the proverb

“A small bird in the hand is better than a big bird in the sky”.

 And he closes a profitable deal with his own hands. Thereby cutting off profit. Which is why we come to the market.

– Intuitive hope (for a trend reversal, for reducing losses without your participation, etc.). All these endless

“I think… I think… I think”.

 Paradoxically, many people can look at growing losses for days, weeks, months. Without taking any active actions, as if under hypnosis, or with his hands tied. Because there is hope:

“it seems to me that the trend will turn around”

. Sweet false hope.

– Not understanding the importance of commissions paid to the broker (spreads, swaps, etc.). In the long term, these small amounts, cents and dollars, can grow significantly. And to nullify even profitable trading.

Perhaps these five signs are enough. If you have noticed at least one, know that you are only at the very beginning of the way. The most interesting way.

Conscious incompetence

If you are still interested in trading after all this, go ahead.

Let’s talk about the second stage – conscious incompetence.

I think many people have heard about the organization “Alcoholics Anonymous”, at least the name. Recall: this is a non-profit partnership that helps people suffering from alcohol addiction. It helps with phenomenal efficiency. This method is based on the “12 steps” program.

We sometimes see it in the movies. The person gets up and says:

“Hello, my name is Jack, and I’m an alcoholic”.

 The most important first step is to admit your powerlessness in front of the problem. Everything else later. There will not be this first correct step – there is nowhere else to go. If a person sincerely does not see the problem, says:

“I sometimes drink, it happens every day, but of course I’m not an alcoholic…”

 – it won’t work. Many people get drunk and die without finding the strength to admit the obvious.

Let’s draw an analogy with the levels of competence of a trader.

You are a beginner, you are only taking the first steps. Gradually realizing that for some reason there is no permanent profit. In the market, you lose much more than you earn. You make mistakes in your forecasts every day. You are tormented by panic fear, then animal greed, unwillingness to lose even one dollar. As soon as you open an order, a bearish trend instantly turns into a bullish one, and a bullish one turns into a bearish one. The market seems to have taken up arms against you personally, does not allow you to earn a single cent, constantly deceiving you.

Is this a problem? Without a doubt.

What should I do? To begin with, recognize the problem – incompetence.

Everything else later.

The beginning of recovery begins with the recognition of the disease. Any ambulance doctor can tell a hundred stories when people really died, trying, for example, to cure pneumonia – paracetamol, an acute attack with a ruptured appendicitis – aspirin, chronic bronchitis with laryngeal edema – warm milk with honey, etc. These people did not want to admit their problems and paid for it.

Most traders are eliminated at this level. Surprisingly, people can take the “ostrich position” for years. Lose whole fortunes, but never admit to themselves that they have real problems with trading.

The next trap on the way of a trader who realizes that something needs to be changed is the most dangerous illusion that someone will do this work for you. Let’s explain: more competent people can really help you, suggest something, teach you something. This is absolutely normal. But they can’t become a trader instead of you.

But trusting people are beginning to subscribe to paid signals, buy (sometimes very expensive) indicators, look for investment managers (who will earn them 100% profit per month), connect trading robots, the principle of which they do not even understand… This is the way to nowhere. More precisely, to a quick or slow loss of money. Do you need it?

Trading signals will start to fail when the market changes (for example, from a quiet trend to a volatile trend). An anonymous manager will suddenly disappear after draining your deposit. Trading robots will start making losses instead of profit, and you will not even understand what is the matter. Bill Williams wrote in “Trading Chaos” that if there really was a trading robot that consistently brings profit always and everywhere, it would be rented out for at least $ 30,000,000. Per hour, of course. We will make an adjustment for inflation (since the writing of the book) and estimate the cost of this hypothetical lease at $ 50,000,000. For a non-existent robot.

Imagine the following situation: you are in a foreign country, and for a long time. And you need to live and work in these circumstances. What to do? Learn the language of this country. By myself. If you want to survive. Textbooks, dictionaries, translators will help you – but the main work is still yours.

It’s the same in trading. You have found yourself in a new environment (financial markets), where you need to first survive (not go broke), and then succeed (make a profit). Learn a new language for you – the language of the market. There is no other way.

Recommendations:

– Never despair. Having realized your incompetence, think about the fact that you have just made the right first step. The majority (up to 99% of traders) could not do this either. Further improvement is absolutely real. Stable profit generation is possible and achievable. Go forward.

– There is nothing to do in trading without serious self-education. Again – do not look for easy ways – they do not exist. Don’t chase flashy headlines from anonymous authors: “

Eight myths… ten facts… five simple steps… a new indicator… a strategy that gives 310% per month…”

 and similar information garbage. Most often, such nonsense is written not even by traders, but by copywriters who have not earned a cent on the market. Don’t let them earn money from you. Learn to earn money yourself.

– Constantly read professional literature. Without haste, thoughtfully, making extracts, performing exercises. From my personal experience: I realized myself as a professional after about a hundred books I read and several years of constant work on myself. And who said it would be easy?

– Don’t rush things. Don’t set any hard time goals:

“I have to become a trader in a year”

. This will take as long as it takes. A doctor, before performing the simplest operation, studies for at least six years. Who said that the profession of a trader will be easier? Why on earth would a market with a turnover of trillions of dollars start sharing profits with dilettante? Think about it.

Conscious competence

Let’s imagine a first-grader who wants to get a job and start receiving a salary. For example, to the investment department of a large bank. The desire itself is laudable, but infinitely far from reality. He needs to finish school. Then finish the institute. And when you have some knowledge and experience in your head, tested on numerous exams – then get settled wherever you want.

Everything is the same in trading. It takes time to achieve a professional level, of course, provided that constant efforts are applied. And you will not be able to jump over these steps, do not even try, do not waste your time. Even a capable seven-year-old child will not understand anything in integral calculus, logarithms or Ohm’s law for a section of an electric circuit. And this is normal. He will understand in due time.

However, many novice traders do not understand these simple things. Downloading a trading terminal and reading a couple of books (or even anonymous articles), for some reason, are considered quite a sufficient condition for obtaining a stable profit. Only serious money likes a serious approach. They are indifferent to naive dilettantes.

You need to spend a lot of time and effort watching the market, noticing market vulnerabilities. You need to trade, try, make mistakes. Read and reread the necessary books. And only then, for those who did not give up, who found the strength to get up after falls and disappointments, a new facet of skill opens up.

It is typical for a modern person to count on the rapid achievement of goals. Advertising actively exploits this psychological vulnerability. We are offered to become slim and muscular in a couple of weeks by buying a subscription to a fitness club. Or chew a new piece of gum and immediately get rid of caries. Or be insanely happy by drinking lemonade of a certain brand.

This primitive cunning is also present in trading. Just today I saw an advertisement for training a trading strategy, the use of which is allegedly able to bring 4000% (!!!) profit per month. The person who receives such a profit is an incredibly modest guy, he was even ashamed to open his name and lay out the trading history…

Learn to set real goals, do not chase millions and billions of dollars at once, everything has its own time. Your initial task should be to survive in the market. Everything else later. If you have not lost money for several months in a row, you can congratulate yourself – after all, you have reached a level that 95% of traders cannot overcome. This is a great result for a beginner.

After reaching the break-even stage, start working on gradually increasing profits. Again, thinking about the real size of earnings, and not about money waterfalls. A profit of 1% per month is a success. Even a stable monthly profit of 2% is an excellent result. This is how much Warren Buffett earns from the 50s of the last century to this day.

Or are you smarter than him?

When calculating interest on interest – without withdrawing funds from the deposit – the progression generally works wonders. Check yourself on the calculator, taking your trading account as a starting point. How much can you earn in five years at 10% per annum? And in ten years? Surprised?

For your information, investment managers of large hedge funds and major banks are simply happy if they manage to earn 15% per annum. As one major investor said:

“Their names are forever in the financial hall of fame”.

Recommendations:

– Do not relax, even after reaching the level of conscious mastery. There is always somewhere else to grow. Even steadily making a profit, from month to month, from year to year – never consider yourself smarter than the market. This is the most dangerous mental trap. Repeated financial crises every ten years (or more often) can suddenly and crushingly correct such self-confidence. Traders who survived the crash of 1987 recalled that the market then opened far beyond the level of the established stop-loss. Just “jumping over” them all in one fell swoop. In such a stalemate, stock market players can only look at the losses.

– You should never stop working on improving your trading system. This is by definition an infinite process. Markets tend to change, and what worked perfectly yesterday may not work at all today. Observation, constant self-education, creative thinking – can not but give birth to new trading ideas. You will begin to notice more and more new market vulnerabilities. And use them to make a profit.

– Do not try to embrace the immensity – to profit from every price movement in any direction. It’s impossible. Our task is to get a decent profit on obvious trends. It is enough to be on the right side of the market even for 50% of the “life” of the trend. For example, if a short-term bullish trend lasted for a week, and you held long positions for two or three days – great. This is more than enough.

Unconscious (intuitive) competence

Once upon a time, a young Russian scientist Peter Kapitsa (future Nobel Prize winner in physics) I was at an international technical exhibition. It was in the first half of the XX century. Then the United States presented a technical novelty – a complex electromechanical device. Suddenly, right during a demonstration in front of the public, this pride of American engineering broke down. It was not possible to perform repairs on their own.

And then someone suggested:

“Among us is the great Russian scientist Kapitsa. He will surely be able to fix it, he is a genius!".Th

e price for repairs was promised at that time huge – a thousand dollars. A lot of money.

The physicist accepted the offer and asked to bring him a hammer. He carefully walked around the unit from all sides: looked, listened, thought. Then he swung and hit a certain point. The device immediately started working. The manager of an American company paid the promised amount (for comparison with today’s prices, you need to multiply by about thirty – we get $ 30,000).

For a report to the accounting department, he asked to give him a receipt for receiving money. And an estimate for repairs with a list of completed works. Secretly hoping that Kapitsa would be ashamed to take the entire amount for such a small effort. Just one hit.

However, the scientist was not confused by this request and he wrote on a piece of paper:

Receipt

I have received US $ 1,000 according to the estimate for the repair:

Hammer blow – $ 1

Determination of the place of impact – $ 999

This seemingly simple blow concealed a huge amount of experience and knowledge.

Intuitive trading is the last stage at the end of a long and correct way. And it will not be achieved in a short time. You will not be able to jump over the steps (skill levels). First you need to understand that you know almost nothing and do not know how. Then you will learn a lot, gain experience, including unsuccessful experience. And only then, perhaps, an intuitive understanding of the market situation will appear.

Intuition is an unconscious skill. Jesse Livermore wrote about intuition in trading, being already a millionaire, after decades of stock trading. Jesse Livermore wrote about intuition in trading, being already a millionaire, after decades of trading on the stock exchange. George Soros wrote about the same thing, after successfully managing his multibillion dollars investment fund for many years. If you do not have at least five break-even years in the world of professional trading behind you, do not rush to become on a par with the people mentioned above. It’s too early for you.

A novice boxer who knocked on a pear for a couple of months and imagined himself ready for a fight with Mike Tyson is not just ridiculous. Dangerous to himself. He will lose with a probability of about 100%, and it’s still good if he stays alive and well. To begin with, the right step is to train like Tyson.

Mike recalled in his autobiography “Undisputed Truth” that after training, he did not have the strength to walk, and… he was crawling to his room. He lived at that time in the house of his coach Constantino “Cus” D’Amato. He had to crawl from the first floor, where the gym was located, to the third floor. And only then, after long and hard training, Mike defeated opponents in the ring in a matter of seconds. Most often – a direct blow to the chin. The simplest intuitive movement.

And yet, every trader (be