Investor, trader, player. Greed is bad

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!".The 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 (beginners even more often) has encountered one or another manifestation of intuition. Many people are familiar with the feeling when, without any clear reasons, it seems that the trend is about to unfold. Or vice versa – it will continue. The irrational principle is generally very strong in a person.

So, in order not to lose profit, you need to fix it right now. Then it will be too late! But after the order is closed, the price moves in the right direction by 3,000 ticks. Or the same trick with losses: it seems that the trend is about to turn around, and the losses will definitely turn into profit. We need to be patient a little more, and more, and more… This may result in “margin call” (lack of funds on the trading account) or “stop out” (forced closing of positions).

Fight with such “intuitive insights” as with the worst enemy. Otherwise, these fantasies will ruin you. And it will no longer seem to you that there is nothing on the deposit. The trading account will indeed be empty.

Recommendations:

– Over the years of practical work in the market, I can say that it is before a powerful price movement that the temptation to close a position will be especially strong. And before a catastrophic increase in losses, it will seem to you that you should not accept losses. As if you need to wait another five minutes (an hour, a day, a week) and the trend will surely unfold. Use these unprofitable illusions to your advantage. When “hands itch” to close an order with a small profit – by an effort of will, breaking yourself, turn off the trading terminal. And just take a walk for a couple of hours. With a high probability, the profit will significantly increase. Try this. You’ll like it.

– Of course, not every one of us is Peter Kapitsa or Mike Tyson. Think about it, for example, how many doctors are there in your city? Many. And how many doctors are there from God who are able to put an almost hopeless patient on his feet? Few. How many school teachers are there in your city? Many. And how many outstanding teachers who are able to interest students so that they do not want to leave the lesson? Few. And this is normal. True talent has always been a rare phenomenon.

– It’s the same in trading: you’re not Livermore, Buffett or Soros. Do not try to appear to be someone who you are not. To reach the level of a professional (steadily earning, and not losing in the market) is quite an achievable task. For anyone who has the determination. Determination to learn every day. The determination to fall and rise, to make mistakes and correct them. And the most important thing is the determination to change.

Step by step