To become a master, you have to practice deliberate practice. You have to work to get better. Let’s break it down and then apply this to the trading process—before, during, and after the trade.
K. Ander Ericsson, who coined the phrase "deliberate practice," (1) says that “….the differences between expert performers and normal adults reflect a life-long period of deliberate effort to improve performance in a specific domain.” To get better at getting better, you’ll need:
- Pre-existing Knowledge
- Immediate Feedback
Let’s explore these further as they apply to trading.
1. YOUR Motivation To Master Trading
Why do you want to trade? The obvious reason-in my best Captain Obvious voice-is to make money. However, you’d be surprised at people’s motives. I often pose the "why trade?" question at trading conferences. "To make money" is often the third or fourth answer, and usually not without a little steering from me. Maybe you might want to become a trader to make your evil co-workers jealous, because your boss is douchey, because you’re sick of your current career, or because you just want to prove to your spouse/significant other (and btw, who am I to judge, but you might not want to have both) how truly awesome you are. Yes, these could be the initial motivating factors, but once you dive in, you’ll have to put them aside and focus on the one, and only reason, again, to make money!
Provided that your motivations are in the right place, you then have to ask yourself if you’re willing to approach it like any other profession? You wouldn’t decide on Friday to become a surgeon, study a bit over the weekend/pick up some Xacto knives, and then start cutting on people on Monday. Even Ludacris would say that’s ludicrous. Yet, that’s exactly what many people do. The barrier to entry is virtually nil in this business. Fund a brokerage account with a few K and voila you're "a trader!"
Again, you’ll have to approach trading like any other business. No, you didn’t become a doctor, lawyer, or automatic transmission mechanic overnight. It took some time. Trading is no different. In fact, in some ways, it can be more difficult because there isn't a clear path. I once received a very nasty email from a medical doctor. He thought my point was that it was easy/easier to become a doctor. This was NOT my point. My point is not to minimize other careers. The point is that there isn't a clear path in trading.
Case and point: Occasionally, I find myself on panels at trading conferences. In one of these, the "no clear path" discussion came up. Someone pointed out that to become a plumber, you had to have specific training, become a journeyman, pass tests, and then apply for a license. It's a process and a lengthy one. They went on to give other examples such as flying a plane or a teenager getting their driver's license.
2. You’ll Need Some Pre-existing Knowledge To Master Trading
To get better at something, you’re going to have to have some idea of what you’re doing in the first place. This is where there appears to be a riff between Gladwell who wrote about the 10,000-hour rule and Ericsson who argues that it’s the quality of the practice and not just the quantity. In defending my favorite author, I think many have misconstrued Gladwell’s words (which were actually based in part on Ericsson's research) as a “given.” Even Gladwell admitted that he could bang on a piano for even 20,000 hours and still not be Mozart.(2) His point is that it does take time to cultivate talent. It does.
How Do You Get "Pre-existing Knowledge" If You Don't Know Where To Start? Start by watching the free videos in the Member's Area:
I often piddle around in the garage to help get my head on straight. One day I heard a loud noise that can best be described as a small animal being tortured. I bravely rushed into the house to save the day. The noise was coming from the bathroom. It was my daughter singing, well, at least making a vain attempt. And, that was just the beginning. In coming weeks and months she continued to "sing"-and I use that term very loosely. It became evident that she wasn't going to give up anytime soon. Based on her seriousness combined with the fact that we couldn’t live with the screeching for much longer (nor could our dogs), we decided to get her lessons. As a proud parent, I’m happy to say that she made all-state choir and soon thereafter sung the Star Spangled Banner at a football game with 4 of her choir mates. She then went on to covet the award of "most talented senior" in a class of over 500. Ericsson and Gladwell both agree that getting some help throughout the process is key. Should my daughter have continued on her original path without help, she likely wouldn't be in the elite few (and our dogs would have run away).
20-something years ago, I was hired by a trader to program and run scans to help him find setups. Back then, the software was painfully slow. What takes about "a blink of the eye" today, took over 45 minutes back then. Rather than just sit there contemplating my navel and watching the hourglass, I would kill time (which I know, will eventually kill me) by looking at charts. This is how my process of empirical research and "treasure hunting" began.
I look at around 2,000 charts every day. Conservatively, I have looked at over 10 million charts over the last 20-something years. Initially, I didn’t know what I was doing, but luckily, I had a lot of guidance from someone who did. This helped me to quickly make the leap from blind repetitions to deliberate practice. And, since we were using the setups in both our own and clients' trading, I had a constant feedback loop.
You'll need a little help, but I don't think that you need any special talent. I'm with William Eckhardt on this one:
"I haven't seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren't. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important."
You’ll have to understand how markets work. Obviously, I can’t teach you everything you need to know in just one column, but having the proper mentality goes a long way. My definition of trading via technical analysis is “reading the emotions of the market participants while embracing your own." Figure out how to do that through some deliberate practice, and you'll be wildly successful. That's almost worth a "mic drop."
It’s good to get out every now and then. During the aforementioned panel, someone reminded me that we’re trading traders, not markets. This dovetails in with one of my favorite quotes from Tom McClellan: "When you buy a stock you're not only forming a relationship between you and the company, but you're also forming a relationship between anyone who has bought the stock prior to you. And, those people will screw you!" (watch the first four free Trading Full Circle videos for a more detailed discussion of this)
Yes, you'll need to know what to look for in the first place, but technical analysis doesn’t have to be that technical. For instance, if you’re thinking about buying a stock around 9, and you look at the chart and there’s a previous range between 10 and 11 then it’s quite possible that those who bought within that range will be looking to get out a breakeven. It’s human nature.
Once you do get a reasonable grasp of the charts, you'll then have to know how to execute. The good news here is that the money & position management is mostly common sense and is often mostly mechanical. Yes, once you get the discipline down a little dose of discretion can vastly improve performance, but the initial concepts are quite straightforward.
3. You’ll Need Immediate Feedback To Master Trading
The great thing about markets is that you get immediate feedback. Unfortunately, factoring in the feedback can be tricky. As I often preach, the market can be a very bad teacher. As just one example, nearly all trades will go against you. So the “immediate” negative feedback might not be indicative of the ultimate outcome. This is where you have to resist the innate urge to micromanage yourself out of the trade. Once the trade is done and you have your results, you then have to be careful in analyzing them. You can do the wrong thing and make money. Unfortunately, as you'll eventually painfully discover, "that'll work until 'it don't'." Conversely, you can do the right thing and still lose money. This is where an honest post mortem comes into play (keep reading).
I often speak of the problem with "outcome biases." As humans, we tend to attribute bad outcomes to bad luck and good outcomes to skill. Becoming process vs. outcome oriented is key. (4)
4. Repetition Is Key To Master Trading
As I often say, on the next trade, and only that one trade, follow your carefully thought out plan. And, if you can’t follow the plan for just one trade, then maybe trading is not for you.
Okay, enough tough love. In my best Bela Karolyi voice (which I'm told based on my Coonass genealogy sounds a lot more like the "Townie" from Waterboy): "You can do it! If you can't, just reduce your share size down to a size that's nearly meaningless. Once you do follow the plan on one trade, then "all you have to do" is then rinse and repeat for the next 10,000 trades. Time for another mic drop?
Deliberate Practice Is Sharpshooting Not Taking A Shotgun Approach
Deliberate practice doesn’t mean that you're working on getting better at everything all the time. Quite the contrary. You strive to get better at just one thing. Once you accomplish that, you then add in the next piece of the puzzle on your way to mastery. This goes for the absolute beginner all the way up to the most accomplished of the most accomplished-in any field!
Those newer to trading try to do everything all at once. Instead, they should focus on just one thing. Quoting Bruce Lee: “I fear not the man who has practice 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times. Applied to trading, quoting my sister from another mister Linda Raschke: “All you need is one pattern to be successful.”
I can reduce the obligatory 10,000 hour mastery curve significantly. Just trade one pattern. Once you get that down, then slowly add others. If you’re not successful trading one pattern, then you certainly won’t be successful trading ten.
So, what’s THE ONE pattern? Well, that’s for you to decide. I’d recommend something simple that you can easily wrap your head around. I think Trend Knockouts (TKOs), ideally in persistent and accelerating trends, could be "THE" pattern.
Deliberate Practice In Action: Before, During, And After The Trade
You must carefully plan the trade, trade the plan, and then improve the process by doing a post mortem.
Deliberate Practice Before The Trade
Deliberate practice begins long before the trade takes place. Carefully study the recent big moves. Could you have caught these missed moves with your methodology? Should you have caught these big moves? Is there some pattern, possibly outside your current system, that might have caught these big moves? You have to frame this within the context of you can't trade everything, and there is no Holy Grail. Also, sometimes a market moves for no good reason. Unless you're a former actor who played a gynecologist on TV (isn't that ironic, don't you think?) with a fresh supply of "Roofies," you can't "kiss all the women."
Once you do find something, you must lay out a well-thought game plan. Where will you trigger in? Where will you place your initial protective stop once triggered? And, if you're following along with my hybrid approach to money and position management: Where will you take partial profits (which is simply the entry + risk) and how will you trail your protective stop (both before and after the initial profit target is hit)? For more on this, see the Money Management course in my Member's Area. Also, see the Trader's Mindset course for a discussion on "mind sculpting."
Deliberate Practice During The Trade
I know that you're a motivated individual. Otherwise, you wouldn't be reading this column. You're a person of action. Unfortunately, in trading (especially with my methodology), often there is no action that needs to be taken. Many years ago, I had some trades that were working quite well while I was off sailing the West Indies. This was long before cell phones, so I was completely oblivious. When I got back to the states, I grabbed an IBD at the airport to check on everything. I then announced to the crew what I genius I was. Upon getting back to my office, I immediately cashed in. I then watched like the proverbial deer in the headlights as positions really began to skyrocket without me. Had I just stayed away from my screens, I would have done far better.
As a person of action, it's hard to follow a plan when often there is no action to be taken. The good news here is that there are physical things that you can do to help you follow the plan. You don't have to zip down to the West Indies. You can just turn off your screens. Only observe what needs to be observed. Markets back and fill-A LOT! More-often-than-not, positions will be going against you. In fact, markets only make new highs around 4% of the time. (1) That means that 96% of the time they are backing and filling. So by nature, the majority of time you will be in a so-called "state of regret." For instance, notice Kemet (KEM), one of our biggest winners of the year, has only spent a very small time at new highs.
Many times, I'll cuss and fuss and then storm out of my office for a walk around the block (which is around 2 miles where I live). Not all the time, but often, I'd return to see that the market reversed nicely while I was out. Whenever this happens, I realize that I have put myself through an emotional round trip for no good reason. You must "be as close as you need to be to the markets but no closer" (Market Wizards).
Deliberate Practice After The Trade
You must do an honest post-mortem on every trade. Go back in time to the day before the trade. Forget briefly about the outcome, and honestly ask yourself if you would still take the trade? Did it trade cleanly or bounce around like an electrocardiogram? For emerging trends, was it a well-defined trend turn? (e.g. a Bowtie, see my books, get them free here for a limited time) Or, were you picking tops/bottoms? For established trend trades, was the trend persistent and accelerating? Was there overhead supply? Double check the market, sector, and stocks within the sector. Did they confirm your setup? And, if not, did you think you had the mother-of-all setups that could trade even without a support group? I know it's cliche, but did you truly pick the best and leave the rest? In the past, I've found myself often saying: "what in the hell was I thinking?" (and, admittedly, on occasion, I still do.) When you find yourself asking that question less and less, you'll know that it's beginning to click.
So, how do you master trading and pretty much anything else? Constantly work to get better at getting better. Practice deliberate practice.
May the trend be with you!
When I first wrote this column, I had delayed publishing because I felt that there was so much more to write. I realized that I was just scratching the surface and they'll always be more to write on deliberate practice. Since the original publication (2017), a lot of these thoughts have found they way into the Holistic Trader and Trading Psychology courses in the member's area.
Notes and References:
(1) Peak K. Anders Ericsson, "Peak," Freakonomics Interview
(2) Outliers, Malcom Gladwell