Monday, December 3, 2012

Learning to Make Money

In additional to poker (and about a half dozen other things), I've always been interested in stock trading as a hobby. I used to trade online, but gave it up in recent years as I concentrated on mastering poker. In the back of my mind, however, I've always known I would jump back into the stock market fray at some point.

Enter, an online training site for aspiring day traders. The guys who are spearheading this new site are the same folks who run I'm not quite ready to hop in with both feet at this point, as the WSOP journey is number one on my to-do list for the coming year, but I am dabbling again. Yesterday, for instance, I watched an intro video on Tradimo that covered the five stages a newbie typically goes through on their path to learning stock trading.

One of the really interesting things that occurred to me watching the vid is that the process of learning stock trading (where the ultimate goal is to make money) is highly similar to the steps successful poker players take on their journey to mastering the game. According to the Tradimo video, the five stages of learning are:
  1. Unconscious Incompetence. In this stage of their learning, beginners get into stock market trading primarily because of greed; they hear stories of how much money people can make trading, and they're eager to jump on the band wagon. Emotions strongly influence how the trader acts. They hop in and out of different trades based on all manner of input; trading is almost random in nature. Two outcomes typically result from this: a) initial trades go badly; or b) initial trades go well. The former is actually better in the long run for the trader due to the overconfidence that stems from the latter; winning randomly actually increases risk taking and reinforces bad habits, which will ultimately lead to big losses. At this point, many beginners lose money and, consequently, lose interest in trading and quit. Some, however, realize the error of their ways and move into the next stage of development.
  2. Conscious Incompetence. The trader in this stage finally realizes they know little about how the market actually works. They start to seek all kinds of "secrets" to winning. They do this by reading books, watching videos, subscribing to newsletters, etc. They switch between strategies and systems, trying to find something that is instantly profitable. When they lose money, they blame the brokers, the market, the fundamentals, the economy, their system, and so on for their losses. This is a very dangerous stage, as the trader is prone to scams that offer "the secret" to winning. The keys to moving out of this stage and onto the next are a) sticking to one proven system; b) using a trading journal; c) reviewing previous trades; d) pre-planning trades/not just jumping into them; and e) taking responsibility for their own trade failures. Assuming they get this far, traders can then move into the next stage.
  3. An Awakening Moment. This is the moment when the aspiring trader realizes that success at trading hinges almost entirely on having the right mindset. They finally understand that the day-to-day market is not predictable. They understand that making money is based on a series of trades, not one big score, and incorporates both wins and losses. They learn to stick to their system, entering and exiting trades when their systems says to, regardless of emotions they're feeling at the time. Minimax is key, cutting losses, and letting winners run. Having the right mindset is the a-ha moment here, and at this point they can move into the next stage.
  4. Conscious Competence. A trader in this stage trades when their system calls for it, and they don't when it doesn't. They deal with losing much more easily because they have confidence in their system over the long run. They realize at this point that money management is a key element to success, building money over time instead of trying to get rich quick, and not risking their entire savings on one big trade. They have confidence in their system; they trade (or don't) regardless of what their emotions tell them. They aren't trying to get rich overnight. At this point, they can move into the final stage of development.
  5. Unconscious Competence. Here the trader has so much experience and practice that they trade almost automatically. They are highly disciplined at this point, and they require very little effort to deal with their emotions. They make steady, regular money. They know when they should trade, and just as importantly, they know when they shouldn't. When they lose money, they shrug and move on, learning what they can, but in general not worrying about the loss. Long-term winning trading professionals fall into this group.
Wow. Sound familiar? Go back and re-read these five steps now, but substitute in the words "play poker" wherever the words "stock trading" are used. Change out the words "trading system" with "poker strategy" such as TAg play. Replace phrases like "the day-to-day market is not predictable" with "the card that are dealt are not predictable." And change "money management" to "bankroll management."

In other words, learning trading is a lot like learning poker; it is a psychological journey to overcome, with a number of difficult obstacles in the path. It's almost more emotional than technical. The more aware a beginner is of this and the stages of learning, the easier it is to slog through and ultimately become a winner. People with the will to learn from mistakes excel. People who can self-examine their psyche and pinpoint where their emotions are will make money in the long run.

And those who don't or can't, won't.

All-in for now...
PS. I feel like I'm solidly in the Stage 4 part of my poker development. I'm fully invested (pun intended) in my basic LAg and REDi system of play, I'm in it for the long run, and I'm fine with losses (especially bad beats). I still have some BRM issues to deal with, and until I get that under control, I won't be able to make that final step into the fifth category of "Unconscious Competence." Stay tuned...

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