I’ve learned everything there is to know about trading.
Says no professional trader, ever.
This is something I teach to my trade advisor students every day: not improving is deadly in this business. Seeing your P/L go south kind of deadly.
Every trader who has made it has done so because of continuous learning. A desire to get better at the trading game. Every single one of those traders has a trader development plan. But what exactly is that?
The Trader Development Plan
Just staring at charts won’t cut it. It’s true that as a beginning trader, you do need chart time to start getting a “feel” of the market. After a certain point, however, staring at charts is about as counterproductive as can be. If anything, you’ll exhaust your ability to stay focused and will start to force trades.
So just mindlessly flipping through charts is a no-go. What does work, is this:
6 steps that make up the core of your trader development plan.
Step 1: Dedicate
If you’re trading, your trading. It won’t work if you try and do other things in between. You run the risk that either your trading will suffer or that you’re not focused enough on the task at hand. In my experience, reserving blocks of time in my calendar, specific for research and development purposes, works so much better than just “winging it”.
So it’s important to dedicate time in order to improve yourself. This should also happen as often as possible because repetition is quite important in this process. If possible, try to reserve an hour each day on doing research, working on your trader development plan and improvement. This way, you’ll see the biggest benefits in your trading performance. Include this in your trading routines.
At the same time, you need to want this a hundred percent. There’s nothing worse than someone who wants to have the trader lifestyle but doesn’t want to put in the work. I recently read this awesome quote that pretty much sums it up:
You can’t live a 1% lifestyle with 1% effort.
And still, many traders I speak to expect this to happen with minimal effort! So before you start your journey as a trader, have a good, long think about this. Are you willing to put in the work, get up early to do your prep, do the long hours, work on the weekends when your mates are out, keep going after you fail and fail again? Because that’s what it takes to be a trader. It’s a fantastic lifestyle and I wouldn’t want to trade it for the world, but nothing comes for free.
Key Takeaway: in order to become a pro trader, you need to put in the work. Dedicating time to improve allows traders to stay on top of their game.
Step 2: Measure
This is definitely something I inherited from my days as a software engineer. In IT, the mantra is: measure everything. Meaning that, without data to back up your assumptions and hypotheses, you have no idea if you’re on to something or not. And if you have no idea, well, then you’re just mucking about.
It works very similar with trading. Maybe you have a hunch that you could have more wins if you cut your losses faster? Or do you wonder if your trade micromanagement really works and instead, you would be better off letting your trades play out? Without the data, you’re just guessing. Let the data speak – let it dictate your actions.
No one ever becomes a profitable trader on guesswork.
Here’s a sample of the data I track for every trade:
- all trade data such as position size, entry, exit, stop loss and take profit
- date and time information: entry date, exit date, potential in-between modification dates
- highest and lowest price in between entry and exit
- setup type
- forex pair
- emotional state at different phases of the trade
- MAE and MFE
- how clean the trend was (A, B, C)
- confluence factors (S&R, Fibonacci, RSI divergence, Pivot points, etc)
- first, second or third entry on a specific setup
- overall setup quality (A, B, C)
- screenshots before the trade and after the trade
- how well I managed the trade
- many alternative strategy outcomes (what-if scenarios)
- free-form comments
This is just a selection. I have a database with much more information per trade in order to get various types of statistics from it and also to develop automated and assistive trading systems that use certain data as input.
Measuring everything should be a key component of your thought process on everything. I find that I can usually divide traders into two groups: what-if traders and the rest. What-if traders will go about their trading day with an incredibly inquisitive mentality, questioning everything. This doesn’t mean they’re insecure about their trading, they just don’t assume anything is true because they read it somewhere or because it is how it works now.
The important thing is not to stop questioning. Never lose a holy curiosity.
Instead, they will constantly seek for ways to improve their trading game. The way they will do this, is by asking themselves what-if scenarios. What if you’d be more profitable when you took 50% profits at 2R? Measure the alternative outcome for every trade. What if you would cut every losing trade after you saw an engulfing bar in the opposite direction? Go over your trades and keep custom statistics of what happened. What if you only took trades in the direction of the 200 EMA?
These traders will usually improve a lot faster than other traders. They have an inherent desire to find the best possible solution to a specific problem and know that the answers can be found in the data.
A Trading Journal is Key
Which brings me to the last point of the measure step: how do you keep track of this data? You might’ve guessed it: use a trading journal. A trading journal should allow you to keep track of all your trade metrics, whether it be simple statistics such as your entry and exit price, or custom metrics such as the setup and trade outcomes. You could do this in a text editor or something like Evernote, but you would make your life rather hard because it’s difficult to generate statistics from it.
My advice would be to either keep your trades in Excel or use a specialised trading journal such as Edgewonk. This makes inputting trade stats a breeze. Additionally, using a trading journal makes it easy to reach useful conclusions and find ways to improve your trading game.
A trading journal serves another purpose: research has shown that if you write something down, you’ll remember it much better. This means that when you take the deliberate action of writing down your trade data, results and accompanying emotions, you will recall them for a much longer time.
To give an example: let’s say you had a trade hit your stop and wrote (in all caps!): “I NEED TO CUT MY LOSSES FASTER!”. Chances are that next time around, you’ll be more likely to remember this and actually cut your losses faster because you wrote it down.
Key Takeaway: do you ever wonder if an alternative strategy would work? Measure it. If you don’t yet do so, track your trades, relevant data and your emotions in a trading journal.
Step 3: Practice
Learning by doing doesn’t work. It’s what many call blind practice: doing the same thing over and over again and expecting different results. Mindlessly scrolling through charts, looking for a setup. You can compare it to a musician who plays the same tune over and over again. It’s obvious that this won’t make him/her a top musician. A trader staring at charts is the trading equivalent of that musician.
Instead, traders need a different kind of practice: learning by focussing on specific elements of a skill you want to learn or improve, and working on those elements until it has become second nature and part of your routine. You do this using drills and exercises that focus on acquiring that skill in increments until it doesn’t require any thought anymore.
Amateur musicians tend to spend their practice time playing music, whereas pros tend to work through tedious exercises or focus on difficult parts of pieces.
This is often called deliberate practice. It speeds up your learning process immensely and here’s how you do it:
Short Guide to Deliberate Practice
Before anything else, know that improving a skill is often frustrating. You will run into barriers of things that don’t yet work as expected or you might encounter concepts you don’t yet understand. This is normal. The discomfort you experience is exactly what is inherent to learning a new skill. It means you’re doing it right. Embrace it and you will find it easier to improve.
1. Define Targets
The first step in your practice as a trader should be defining what your target will be. What do you want to learn or improve on? Let yourself be guided by the data from your trading journal. Zoom in on things in your trading journal you need to improve. After tracking your trades for a while, it should become apparent what can bring you the most benefits.
Maybe you have difficulty in pulling the trigger on perfectly good trades? Or maybe you have issues with increasing your position size? Maybe you keep getting distracted by other people’s opinion instead of doing your own trade analysis? Or maybe you never seem to be able to cut a losing trade, even though you well know about the mantra “cut losses short, let winners run”? Whatever it is, write it down on a piece of paper, this will allow you to keep focused during your practice sessions. Believe that you will be able to do it.
2. Deconstruct The Skill
Now comes step two: deconstruct the skill you have set as your target. This is where a technique like the 5 whys can be helpful. If you’re doing something wrong, WHAT exactly makes you cause this behaviour? Do you leave losing trades open because you think they will turn around? Because you’re uncertain about your trading system? Why are you not able to put on a trade if your system shows you it’s a valid trade? Maybe you’re fearful of losing money?
This shouldn’t only be related to trade execution, too. It could just as well be process-related: maybe you don’t have the necessary routines in place to be prepared for the upcoming trading week. What’s important is to try and come to the smallest incremental skill you could acquire in order to help yourself reach the target.
3. Shorten The Feedback Loop
Step three is all about practice. If you have difficulty cutting trades, get to backtesting! Backtesting is beneficial for many reasons, but in the context of deliberate practice, the main benefit is that it shortens the feedback loop. It allows you to see how some change is performing, while you are practising. Traders often know what to do, but fail to actually do it when the moment comes. This is in part because the feedback loop is too far apart: the moment you experience the effect of a certain action is often too far apart from the cause. Shortening that feedback loop allows a trader to see the immediate benefit of changes in their actions.
In this step, it’s important to learn often, in short blocks of time. Keeping your practice sessions short will avoid mental exhaustion and information is better retained if it is repeated often. Because of this, it’s often better to practice half an hour every night than doing 5 hours in the weekend (the combination is of course even better!). During practice, make a lot of mistakes. Be aware of them and keep track of what works and what doesn’t. Review your practice sessions to see if patterns start to emerge that could improve your trading performance.
4. Further Reading
If you want to know more about deliberate practice and acquiring new or improving existing skills, I recommend that you check out these three books:
- The First Twenty Hours. How To Learn Anything… Fast! by Josh Kaufman
- The Talent Code by Daniel Coyle
- Peak by Anders Ericsson
Key Takeaway: Don’t just flip charts but go for deliberate practice. Zoom in on specific aspects of your trading that could use improvement and practice those until they become second nature.
Step 4: Read
Every pro trader I know spends a fair amount of time on reading. Warren Buffett famously spends about 80% of his time reading. Have a look at my recommendations of the best trading books and the best non-trading books that will still help your trading. As with practice, the best way to increase your knowledge through reading is to reserve some time daily to read and make it a daily habit.
There are two types of reading you should be focusing on:
- trading books
- research papers
The first category allows you to explore new concepts and insights in trading, which in turn can increase your understanding of markets and trading in general. The second one is often not included but in my experience, many of the most valuable texts on trading strategies are written by actual researchers. Have a search on Google Scholar and arXiv to find most of the papers that are published for free.
Even when the papers themselves are not free, the abstracts often are. With a bit of luck, these abstracts already contain enough useful information to get you started. Just search for “trading strategies” on Google Scholar to get started!
Key Takeaway: You can’t improve what you don’t yet know. Read often – both books and research papers – to increase your knowledge of trading related topics.
Step 5: Exercise
Amongst the group of profitable traders, how many are out of shape, overweight slobs? Very few I’d imagine. Discipline is a way of life son.
— BreakingOutBad (@BreakingOutBad) May 16, 2017
Once it becomes habitual, discipline has a way of permeating through our lives.
If you have the discipline to be a professional trader, you’ll likely have the discipline to live a healthy life too. Conversely, if you can’t get up on time in the morning and your way of approaching the markets is just to wing it, guess what? Most of those people won’t have the discipline to go for a run or have a few gym sessions a week.
There’s a reason why former top athletes consistently perform better in financial markets. Traders, just like athletes, face tremendous pressure, stress, and expectations that would crush the ordinary, unprepared individual. It’s no surprise that there are so many similarities between sports psychology and trading psychology.
If you feel tired and have all sorts of health-related issues, you simply can’t perform well. You need clarity of mind when you’re trading, it’s why one of the items on my trading checklist is “do I feel good, both mentally and physically?“. Without any doubt, exercise will help your trading game and meanwhile, will make you a healthier person.
Next to regular exercise, I’d like to take a moment for meditation. I know that many people have mixed feelings about meditation (I was once one of them!), but it did help me be more focused in daily life and trading in specific. These days, there’s nothing spiritual about it and apps such as Headspace (my favourite) makes it very easy to get started. It’s not for everyone, but give it a try and you might like it!
Key Takeaway: Mens sana in corpore sano. Living a healthy life by eating well and exercising regularly will absolutely help your trading. Optionally, try meditation as a way to become a more focused person.
Step 6: Play The Long Game
Many traders are attracted to trading because of the money. And let’s not be hypocritical, money is definitely a factor. However, the problem arise when many of those traders start to chase the cash and once you’re in it for just the money, you’re going to become real impatient really soon. You need passion for this business, too.
Traders want to have a life of trading but at the same time expect results in three weeks time. Understand that this is ridiculous. You should approach trading as you would with any top sport or profession. If people need to study or work for years before they reach the pro level, why should trading be any different?
If you make goals, instead of expecting results in days or weeks, think in months and years. If you’re working on a new trading strategy, it’s not uncommon to work a couple of years on it before it’s ready. Play the long game.
One last tip: stop aiming for perfection. A good trading system is often ruined by trying to make it perfect. You can and should improve, but don’t try to break it by trying not to have any losses or something similar, it won’t work.
Key Takeaway: Start thinking long-term. If you’re going to be doing this for the rest of your life, what’s a couple of years learning the craft? Play the long game and you’ll be less disappointed when things take a bit more time than expected. You’ll get there eventually.
Having a trader development plan is critical for your self-development and success as a trader. Using the following 6 steps will enable you to keep improving and be the best trader you can be. Here are the 6 steps one more time:
- Step 1: Dedicate
- Step 2: Measure
- Step 3: Practice
- Step 4: Read
- Step 5: Exercise
- Step 6: Play The Long Game
What do you do to improve you trading? Let us know in the comments!