How much training you need depends on the job you want. If you want to be a janitor, an hour of training might do. Just learn to attach a mop to the right end of the broomstick and find a pail without holes.If, on the other hand, you want to fly an airplane or do surgery, you’ll have to learn a great deal more. Trading is closer to flying a plane than to mopping a floor, meaning you’ll need to invest a lot of time and energy in mastering this craft. Society mandates extensive training for pilots and doctors because their errors are so deadly. As a trader, you are free to be financially deadly to yourself—society does not care, because your loss is someone else’s gain. Flying and medicine have standards and yardsticks, as well as professional bodies to enforce them. In trading, you have to set up your own rules and be your own enforcer. Pilots and doctors learn from instructors who impose discipline on them through tests and evaluations. Private traders have no external system for learning, testing, or discipline. Our job is hard because we must learn on our own, develop discipline, and test ourselves again and again in the markets.
When we look at training for pilots and doctors, three features stand out. They are the gradual assumption of responsibility, constant evaluations, and training until actions become automatic. Let us see whether we can apply them to trading.
1. The Gradual Assumption of Responsibility
A flying school doesn’t put a beginner into a pilot’s seat on his first day. A medical student is lucky if he is allowed to take a patient’s temperature on his first day in the hospital. His superiors double-check him before he can advance to the next, slightly higher level of responsibility.
How does this compare to the education of a new trader?
There is nothing gradual about it. Most people start out on an impulse, after hearing a hot tip or a rumor of someone making money. A beginner has some cash burning a hole in his pocket. He gets a broker’s name out of a newspaper, FedExes him a check, and enters his first trade. Now he is starting to learn!
When do they close this market?
What is a gap opening?
How come the market is up and my stock is down?
A “sink or swim” approach does not work in complex enterprises, such as flying or trading. It is exciting to jump in, but excitement is not what good traders are after. If you do not have a specific trading plan, you’re better off taking your money to Vegas. The outcome will be the same, but at least there they’ll throw in some free drinks.
If you are serious about learning to trade, start with a relatively small account and set a goal of learning to trade rather than making a lot of money in a hurry. Keep a trading diary and put a performance grade on every trade.
2. Constant Evaluations and Ratings
The progress of a flying cadet or a medical student is measured by hundreds of tests. Teachers constantly rate knowledge, skills, and decision-making ability. A student
with good results is given more responsibility, but if his performance slips, he has to study more and take more tests.
Do traders go through a similar process?
As long as you have money in your account, you can make impulsive trades, trying to weasel your way out of a hole. You can throw confirmation slips into a shoebox, and give them to your accountant at tax time. No one can force you to look at your test results, unless you do it yourself.
The market tests us all the time, but only a few pay attention. It gives a performance grade to every trade and posts those ratings, but few people know where to look them up. Another highly objective test is our equity curve. If you trade several markets, you can take this test in every one of them, as well as in your account as a whole. Do most of us take this test? No. Pilots and doctors must answer to their licensing bodies, but traders sneak out of class because no one takes attendance and their internal discipline is weak. Meanwhile, tests are a key part of trading discipline, essential for your victory in the markets. Keeping and reviewing records, as outlined later in this book, puts you a mile ahead of undisciplined competitors.
3. Training until Actions Become Automatic
During one of my finals in medical school I was sent to examine a patient in a half-empty room. Suddenly I heard a noise from behind the curtain. I looked, and there was another patient—dying. “No pulse,” I yelled to another student, and together we put the man on the floor. I began pumping his chest, while the other fellow gave him mouth to mouth, one forced breath for four chest pumps. Neither of us could run for help, but someone opened the door and saw us. A reanimation team raced in, zapped the man with a defibrillator and pulled him out. I never had to revive anyone before, but it worked the first time because I had five years of training. When the time came to act, I didn’t have to think. The point of training is to make actions automatic, allowing us to concentrate on strategy.
What will you do if your stock jumps five points in your favor?
Five points against you?
What if your future goes limit up?
If you have to stop and think while you’re in a trade, you’re dead.
You need to spend time preparing trading plans and deciding in advance what you will do when the market does any imaginable thing. Play those scenarios in your head, use your computer, and get yourself to the point where you do not have to ruminate about what to do if the market jumps. The mature trader arrives at a stage where most trading actions have become nearly automatic. This gives you the freedom to think about strategy. You think about what you want to achieve, and less about tactics of how to achieve it. To reach that point, you need to trade for a long time. The longer you trade and the more trades you put on, the more you’ll learn. Trade a small size while learning and put on many trades. Remember, the first item on the agenda for a beginner is to learn how to trade, not to make money. Once you’ve learned to trade, money will follow.