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Part 2: Evolution of a Trader – Where are You, Currently?

In every trader’s journey, there are different pathways in which they develop. Some have a quick head-start, others enjoy a rather slow beginning. Many reach a plateau and lose faith, while others enjoy the toil and tumble of the process. The reality is that, before one really becomes a Master in this field, they decide very early on that either trading is not for them (hence exiting early), or do whatever it takes to master the game and reap the rewards from it.

In this chapter, we will learn the four stages of trading levels in which we all experience, to understand what it takes to evolve to a masterful trader/investor. Let’s begin with the first stage.

1. The Novice (Unconscious Incompetence)

Four level of trading competency

Have you ever made one winning trade, which immediately followed by a streak of losing trades? Did you feel your confidence erodes as you see your trading P&L take a big hit, which in turn scared you off from taking the next opportunity? Yet, here comes the most frustrating thing – you could not understand how your trades went sour; hence you are unable to devise a plan to prevent such things from happening again.        

This is the epitome of a Novice trader, who has yet to understand the strengths and weaknesses of their ability. Most commonly, they simply don’t know the rules of the trading game, the hidden power of leverage, as well as the inherent risks they are exposed to when trading on margins.

Luckily, they are not alone. The truth is all traders have gone through the stage of unconscious incompetent, whether they’d like to admit it or not. By understanding that this is a natural course of development, a trader or investor can quickly acknowledge the shortcomings in their own trading game, before taking their trading game to next level.

2. The Advanced Beginner (Conscious Incompetence)

“The Student” Bud Fox – Wall Street (1987)

At this stage, the trader starts to realize the limitations that caused inconsistency in her trading performance. As the trader starts to examine her previous trades, she then uncovers the underlying reasons what affect the results: the rush of overconfidence after making a few winning trades, which caused her to increase the position size; the lack of consideration for her own trading capital management which triggered margin call and stop-out; the disregard for market-sensitive events which heightened market volatility, thereby increasing the inherent risk of her existing position.

Acknowledging your own shortcomings and weaknesses is not easy, but it is absolutely essential in becoming a Master in the trading field. This is also the stage where most traders just simply “gave up” and quit the game. Once a trader overcome this challenge, she has differentiated herself from the other 65% of traders.

3. The Proficient Trader (Conscious Competence)

Sharpe Ratio: The “Performance Measurement”

Are you now able to comprehensively grasp markets fundamentals, confidently analyse patterns in price charts, and start experiencing a series of well-performing trades? If yes, you are most likely in the third stage of your trading journey – a proficient, consciously competent trader who are well in the top 20% of traders.

This is the level of trading in which a trader has developed an understanding of his boundaries, limitations, as well as the methodologies that works in his favour. The frequency of mistakes is now lower, more likely in the form of omission e.g. missed trades/opportunities.

The most crucial thing that the proficient trader must be aware of, is his/her vulnerability to certain emotional biases that affect their decision-making process, such as the anchoring bias and overconfidence bias. Some traders at this stage start realising massive gains, such as ten-bagger trades (more than 10x profit), these emotional biases will lead to excessive risk-taking and give them a (false) sense of invincibility.

Oftentimes these emotions get the better of the trader, disrupting their successful trading streak, causing frustrations and irritation over the course of their trading journey. Because of these emotional hinderances, trading at this level is still somewhat mechanical and rigid, rather than a smoothly internalized process, intuitive function.

4. The Expert Trader (Unconscious Competence)

Michael J. Burry (“Cassandra”) – The Big Short (2015)

You can now generate results that consistently exceed average market returns. In other words, you have figured out a way to generate “alpha” return, whilst minimizing the risk that you are taking for each trade. The risk-adjusted return of your portfolio, measured by the Sharpe ratio, is at least one or higher, which is considered outstanding in the realm of professional investing.

You may be still following strict procedures, looking at key support and resistance levels, using Fibonacci retracements to enter/exit a trade. However, your sense of the entire process has become somewhat intuitive. In other words, there is a feeling that trading has become “second nature” to you.

You can easily switch between defensive and offensive money management strategy, considered the current state of the markets. When market conditions become volatile and harsh, you know how to rebalance your portfolio and allocate capital towards more defensive assets such as hard commodities e.g. gold, oil, and energy or safe-haven currencies e.g. Japanese Yen (USDJPY), Swiss Franc (USDCHF), etc.

Conversely, when opportunities present themselves, you are not hesitant to enter a trade and take advantage of the leverage being available to you. You know when to take profit on winning trades, and decisively cut your losing one’s without any emotional attachments.

Trading has simply become a game that you blissfully enjoy doing, rather than a burdensome task. At this stage, you are officially in the top 1% of all traders and are most likely managing a multi-million-dollar portfolio.

But are you really one in a million?

5. Bonus: The Legendary Trader (Warren-Buffet Style)

Invest & Reinvest in Yourself and your Portfolio

According to the latest Forbes’ Rich List, there are about 2,755 billionaires in the world known to the public. Many of whom enjoyed a successful business career and invest in a diverse range of asset. These are “Legendary Investors” such as Warren Buffet and George Soros who are truly one in a million. Although the chance of reaching this stage is infinitesimal, it proves that there are no limits in amassing wealth through trading the financial markets.

In conclusion, trading is neither a science, nor an art, but a combination of both. The most difficult stages of trading are the ones that demand conscious will power (Stage 2 and Stage 3). Once trading become second nature to a person, what propels him forward is his continuous passion in the game of trading, the commitment in self-reinvestment, and a little bit of luck.

Upcoming Part 3: DYOR (Do Your Own Research) – Which Markets Do I Want To Trade?