How to Get To The Next Level in Your Trading and Career

“I coulda had class. I coulda been a contender. I coulda been somebody”– Marlon Brando’s  character, On The Waterfront

Have you ever had the sensation that you are bumping up against a ceiling in your career in the markets? That you’re not close to living up to your potential? That you’re stagnating in your development—and can’t  even identify why? Maybe you’re profitable but can’t seem to break through to a new threshold of profitability. Perhaps you’ve developed competence in one market but struggle to develop in other areas?

If you’ve ever had similar feelings of frustration or discontentment, relax—because you are not alone. If you had to imagine your development path as a trader, it would not be a smooth line up. Rather, it would be a jagged, stair step path up, with periods of churning followed by powerful spurts – quite the opposite of a steady, gradual pace. In fact, those churning periods are often characterized by frustration, confusion and uncertainty—which can be so unpleasant at times.

Those feelings are actually the byproduct of how we build competence and become elite performers. In order to train competence, we must practice something that feels unnatural and uncomfortable, until it becomes second-nature. As Geoff Colvin documents in Talent Is Overrated, the idea that some talents can be unlocked and lead to instant mastery is unsupported by any hard evidence. Rather, elite performance comes from sustained, intensive practice; from enhance the fundamental skills that are critical for success in a field; from consciously seeking new challenges and to be stretched. This has been documented throughout a host of competitive and performance-oriented fields, from chess to tennis.

The optimal way to develop skill is through “deliberate practice”, which performance psychologist Anders Ercisson defined as constantly stretching honing oneself to hone and sharpen a technique. After a while, we will have ironed out the mistakes and accumulated sufficient practice in order to make any skill seem flawless and automatic. By its very nature, deliberate practice exists to get us outside our comfort zone, so that we stretch in new and creative directions and develop new skill sets. This sheds new light on our periods of struggle and frustration—they may actually serve as an indicator of progress and development, rather than of reaching our limits.

In Dr. Brett Steenbarger’s book, Enhancing Trader Performance, he makes extensive comparisons between the worlds of sports and trading. As he points out in the introduction, some of the best performers that he had seen in the trading world actually broke many “rules” of trading—they could become emotional, they could lose their discipline, etc. In spite of this, they were incredibly successful, because of their elite level of preparation, focus and above all, their commitment to putting in the hours and hours of screen time necessary to maintain and grow their expertise. The lesson is straightforward—even in a trading context, we need to engage in deliberate practice and stick to the lessons of elite performance in order to improve as traders.

If we want to “move up a level” in our trading, then we need to take the lessons of peak performance and apply them to our very own situation. We need to turn our trading into deliberate practice that prepares us for the “next level”. The very first lesson of peak performance is that we need to understand where we are trying to go: which skills are we trying to develop, what P&L targets are we trying to hit? What categorizes the next level?

Deliberate Practice in a Nutshell

Then we need to structure and engage in deliberate practice that will take us to our goal. It should have the following characteristics:

  1. Have a clearly conceived and measurable goal or target in mind
  2. Have a way of measuring real-time progress toward that goal
  3. Figure out all of the disparate areas and skills that you need to upgrade in order to get there
  4. Deliver feedback
  5. Build up or draw on existing skills in an evolutionary fashion

Point 3 merits more exploration. There are a lot of characteristics of your approach to trading that you can examine and potentially change as you stick to your goal. What do you need to address in order to get there? There are a whole host of questions to ask yourself about your process and the way you go about trading. Remember, trading well is ultimately about making good decisions and the profits come as a function of the decision-making. Here are some process-driven questions to ask yourself that could illuminate areas for improvement:

  1. Methodology—have you defined a process for getting into trades and out of them? Have you researched it extensively and over a long-enough time frame to know that it works?
  2. Winning Percentage—Are you happy with your ratio of winners to losers? Could you, with more diligence or by redefining your criteria, shift that percentage a little bit in your favor?
  3. Wins to Losses—How much do the average gains on a winning trade exceed the losses from a  losing trade? Could you hold on to winners longer, or at least squeeze a little bit extra from them? Could you be more aggressive in getting out of losers?
  4. Risk management—Could you set stop losses at more advantageous levels? Could you increase your position size to make it more likely to reach your target?

Example Case:

Following this blueprint, say you are pursuing a short-term equities trading strategy and want to go from making $10,000 per month to making $15,000. That is a well-defined goal. Obviously, your daily P&L statistics will help you to monitor your progress towards that goal in real-time.

You trade only the most liquid stocks and try to capture intraday volatility. You use multiple setups to get in to positions and pre-define both stop-losses and take-profits. You have been a consistent money-maker but found your P&L plateauing at $10,000/month—and you want to take it to $15,000/month.

You determine three changes to make:

1. Take your win rate from 40% to 45%. In reviewing your trading for the past year, you found that one type of setup had a win rate of only 15%. By cutting out any entries based on this setup, you estimate that your overall win rate should rise to 45%.

You plan to stay vigilant in monitoring the setups that you use to get in to trades, to make sure that they are achieving the 45% target win rate. You also vow to research and back-test a few new potential setups to see how they have been faring, and will add them to your trading arsenal only if they produce win rates of 50%.

2. Use trailing stops. You found that on volatile days, a position could go significantly in the money, but not to your pre-defined take-profit, and then reverse all the way back to your stop. You vow to use some kind of trailing stop, to lose less or possibly lock in a small profit on those kinds of trades

3. Trade bigger size. Your methodology is a consistent winner, earning you $10,000/month.  You have accumulated enough of a nest egg that you can stomach potentially larger losses. As part of striving toward your goal, you resolve to trade positions that are 20% bigger. This should serve to increase your profits to $12,000/month. You will need to manage the additional stress that comes with larger P&L swings.

From now on, you will be  performing your normal routine, with a special focus on these three core areas of improvement. Until you reach your goal, you will strive especially to improve these aspects of your trading because together they are the means to get to your targets. By tracking certain skills for growth and honing them until you attain expert status, your trading has turned into deliberate practice. And you must practice — deliberately — until you reach the next level.

A few other  suggestions of areas that you can target for deliberate practice :

–          If you trade FX, you can move from trading just one or two currency pairs to trading the various cross markets. e.g. from trading just USD/JPY to also trading AUD/JPY, EUR/JPY and GBP/JPY

–          If you trade equities: you can experiment with trading different timeframes or styles simultaneously, in order to give you diversity in your results

–          For everyone: you can trade with bigger size. While the drawdowns are proportionally bigger, this is a sure way to grow into bigger profits. It does some time to get used to the bigger swings, so be very gradual.

If you are curious to learn more, Ari Kiev had a similar discussion in his book Hedge Fund Masters, in which he works with traders to make breakthroughs. A lot of the exercises consisted of committing to ambitious goals for the year, and then breaking them down into more granular actions that could be taken right now. His major emphasis was on building conviction in positions but unfortunately that’s not everything—having higher conviction in a setup that only works 10% of the time will still be a losing proposition.

There may be other barriers to your success besides the ones inherent in your methodology. These kinds of barriers cannot be solved by deliberate practice as they are not skills to be developed. Rather, it could be your environment—imagine if you are trading in an office that is not conducive to concentration or exchanging ideas with other traders; or it could be something deeper, like a subconscious block. Nonetheless, these can stop you from reaching the next level in your trading as well. How do you identify them and overcome them?

Moving past identifiable skills

The most important is to engage in deliberate practice, aimed at upgrading our skillset. Once we have set targets and done the hard work of honing our expertise, we should expect an improvement in results. If we are not getting the results we want despite having done all of the necessary work, then something else is amiss. And it’s probably something that you haven’t considered.

To illustrate this point, imagine that you are an elite athlete who wants to increase his 40 yard dash time.  You get new shoes, to put a bit more spring in your step; you engage in a host of lower body exercises to build strength in the right muscle groups; you go out there and practice every day in ideal conditions. But you are not seeing results. This would suggest that something else is awry—and it could be something you’d never even considered, like nutrition or technique.

I’m going to offer a few suggestions for things that are outside the usual skillset of trading which are worth considering if you want to take it to the next level:

1.            Environment: if you are in the wrong place when you do your preparation or your trading, then this could be preventing you from reaching the next level. As Bella and Steve always emphasize, it’s helpful to have contact with other traders in order to exchange and/or compare ideas. You want that support network to help you get better. It also has to have the right data and newsfeeds, a good speed Internet connection and be comfortable—otherwise you don’t have the right tools to set up yourself up for success.

Your working environment also has to suit your personality. If you prefer library-quiet and your office window is next to a noisy highway, that could be making it hard for you to concentrate and to raise your game to the next level. Similarly, if you like day trading but can only access a screen for a maximum of one hour per day because of work commitments, then you need to consider a different trading environment—or a different style.

2. Personality Mismatch: I’ve written about this elsewhere and it’s worth repeating the point—your trading style must match your personality. If you have a trading style that draws on your personal strengths, then the sky is the limit and you will be able to advance continuously. Otherwise, you will be facing strong headwinds in your journey.

The solution is simple—take an inventory of your trading methodology and feel out which parts of it really resonate with you and what you’re interested in. If you’re an economist by training, then day trading probably doesn’t feel right to you—even if you’re making money. If you spend your weekends winning poker tournaments, then long-term value investing will be about as action-packed as watching paint dry. Instead, the biggest gains to reach your profitability targets are to shift consciously your methodology in ways that get more out of your strengths. Experiment with and practice setups and holding periods that are more in line with your personality, and you will take it to the next level.

3. Subconscious Barriers: Ultimately, because trading is decision-making, it can be influenced by all kinds of biases and thought patterns, many of which we are not even aware of. A lot of these can greatly harm our trading—for instance, a fear of success or a desire for excitement which lead us to make overly emotional trading decisions. This is the great taboo in our industry, because no one wants to admit that they have such inexplicable weak spots in their game—especially when they don’t know how to identify nor how to correct them.

What’s a trader to do to identify subconscious barriers? The first step is observe your results—if you’re plateauing and getting frustrated by your results in spite of deliberate practice, then there could be something at work. The key is to identify the circumstances under which you are making mistakes or subpar decisions—is there a trigger in your trading, such as a certain P&L level that you hit or a number of winning trades in a row? Or is it triggered by something outside of the markets, potentially in family life or in your personal finances?

Once you can locate the triggering factor, then you can start to make educated guesses as to what’s really going on. Obviously, a fight with a family member has nothing to do with the markets—but if it wrecks your mood and leads you to making poor decisions, then it has everything to do with your trading.  Maybe that fight left you feeling scared or  vulnerable or triggered worries that you don’t have enough money to make ends meet. Whatever the feelings are, they are real and can harm your trading performance.

How do you undo these barriers? While I have yet to write a comprehensive guide, I will offer a few suggestions for now.

–          Meditation. As Eckhart Tolle discusses in The Power of Now, training yourself to calm down and meditate properly can help you with turning off harmful thoughts, such as ones that could lead you to trade badly

–          Interrupt them. In his groundbreaking Psychology of Trading, Dr. Brett Steenbarger teaches patients who have harmful thought patterns to notice them as they arise and then to interrupt them, so that they can’t run their course.

–          NLP them. NLP (Neuro-Linguistic Programming) is about understanding your brain’s means of representing thoughts and experiences and then directing them in ways that help you. There are plenty of resources that teach you how to combat and deprogram negative beliefs, e.g. that you don’t deserve success, to install new empowering ones or just to be more resourceful in your everyday life. A good resource is NLP: The New Technology of Achievement.

All of these approaches will give you the necessary tools to identify and at least weaken subconscious barriers to increased success. Are they cure-alls? No. But when combined with the other tools, they should help you to get out of your own way and reach the next level of success, which you deserve.

 

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