9/23/2010

How to learn to be a profitable trader

The day you realize trading success is about developing procedural memory, you will be on path to success. Trading success is about developing expertise. When you try and develop expertise you train your procedural memory. If your efforts at training procedural memory are successful then you will become efficient in trading.  

If we know that the key is procedural memory then why is it difficult to develop procedural memory?



To develop procedural memory you need highly structured environment. When you attempt to develop procedural memory on your own, unless you are extremely motivated and driven (or the correct word according to psychologists is you have very  high self efficacy beliefs) the task is difficult. This is the reason most traders fail before they can achieve profitability. They blame markets or other things for it but in many cases the fault lies with failure to train procedural memory. 


If you look at procedural memory development situations outside of trading then you  will see that all of them impose enormous structure. 

Dancing is a skill developed through procedural memory development. If you see the process used for training dancers you will see that it is highly structured and regimented. You are given specific skill to practice. There is close supervision of the practice. There is constant feedback loop. Enormous hours are spent on practice before a performance is attempted. The learning happens primarily from repeated practice. It takes 10 to 15 years of rigorous practice before ballerinas are considered suitable for major performance. 


Sometime back I was watching the film Ballerina by Bertrand Norman and it gives you a glimpse in to what goes in to making of  a prima ballerina.



What does the Bolshoi Ballet Academy in Moscow do. It takes young girls from all over Russia and trains them in to ballet using a extremely structured method called Vaganova Method. The effort involved in brutal and the instructors are very demanding. It takes anywhere between 10 to 15 years of training to become good ballerina. (If you want to see what is involved in becoming a ballerina watch a documentary called A Beautiful Tragedy.)








The ballet training is primarily about developing implicit memory. Implicit memories are unconscious memories. They are formed through automation. Procedural memory is memory about skill. In the case of a dancer the procedural memory challenge is about developing a complex skill which require enormous co-ordination of various muscles. Through repeated practice the skill becomes automatic and a procedural memory for it is developed. Same way a good trader primarily has developed procedural memory skills related to specific setup. 


Developing procedural memory skills requires breaking down a skill in to process and then mastering those processes. Simpler skills are easy to master. For example riding a bike is easy skill to develop as procedural memory skills involved are relatively easy. The time taken to learn it is small. But if you have to learn extremely complex skills and skills requiring use of multiple skills simultaneously then the training involved for it has to simulate those situations and also allow allow the learner to gain confidence in his own skills. That is the basis for developing procedural memory skills for commandos. 


US Army, Navy, and Air force have world's best training programs. If you study the history of training skills development in these institutions you will find that they were the first to recognize the concept of procedural memory.  If you read book on expertise development, you will see that vast amount of learning about expertise development process has happened through research on training armies. The book Development of Professional Expertise By K. Anders Ericsson explores some of the latest research in this field and is one of the highly acclaimed book in the areas of expertise development. If you want to explore the area of expertise development in more detail you should read it.


Development of Professional Expertise by K. Anders Ericsson


Professionals such as medical doctors, airplane pilots, lawyers, and technical specialists find that some of their peers have reached high levels of achievement that are difficult to measure objectively. In order to understand to what extent it is possible to learn from these expert performers for the purpose of helping others improve their performance, we first need to reproduce and measure this performance. This book is designed to provide the first comprehensive overview of research on the acquisition and training of professional performance as measured by objective methods rather than by subjective ratings by supervisors. In this collection of articles, the world's foremost experts discuss methods for assessing the experts' knowledge and review our knowledge on how we can measure professional performance and design training environments that permit beginning and experienced professionals to develop and maintain their high levels of performance, using examples from a wide range of professional domains.


What does the US Army, Navy or Air force do. It takes raw recruits and through a extremely structured program  it converts them in to exceptionally skilled warriors.  It helps them develop procedural memory through a highly disciplined and structured program. If you want to understand how this is done watch the video  Navy Seals Buds Class 234 Discovery Channel




If your objective is to become elite trader the training process would be similar. The only difference is you have to structure your own training and develop your own training material and then have the discipline to train yourself. Along the way there will be several setbacks and ability to persist under those circumstances is critical. Besides that you should survive the self  training phase without blowing your account (which very few would do). That is the enormity of the task involved in becoming a successful trader. Which most novice have no idea about. Behind every successful self learned  trader you will find similar story of extreme efforts and extreme frustration and then slowly discovery of profitable method. Unfortunately most people will not tell you that. 

All the three examples above distill the essence of procedural memory development:
  1. structured environment
  2. supervised practice
  3. extensive practice

When you try to develop procedural memory on your own, you are your own supervisor, mentor, instructor, motivator and so on. Besides that you are developing your own syllabus. As against that in any structured environment they have studied procedural memory skills required for the job and have template to develop such skills in others. 

That is the big challenge for trader who tries to learn trading on his own. And it is also the reason for high failure rate. 


What can trader do to survive such learning process and become successful:

  1. Understand that learning to trade is about developing expertise. And specifically it is about training procedural memory.
  2. Understand that procedural memory is task specific. So specializing in a setup is extremely critical. Once you select a setup then you develop procedural memory specific to that setup. A trader who is good at trading say momentum stocks on 3-10 days has developed a procedural memory specific to that setup. 
  3. Understand that selecting your trading time frame is critical. If you want to be day trader the kind of procedural memory development you will need is very different from if you decide to be swing trader. 
  4. Understand that less number of setups you focus on better it is. The entire logic behind the procedural memory development process is that it allows you to overcome cognitive load. The more setups you try and trade simultaneously more is cognitive load. When your short term memory gets overloaded you tend to make mistake and get frustrated. First master one setup then you will find mastering other setup easier. 
  5. Understand that there are no secrets in this business. The real secret is your ability to develop procedural memory. Procedural memory can only be developed through "How to " kind of knowledge. If someone gives you a secret way to put stops as a software plugin. It is perfectly useless. Because it does not allow you to develop your own procedural memory skill. Similarly someone gives you 3 picks daily and does not tel you in significant detail how that person actually arrived at those picks, what scans he used, what analytical methods he used to arrive at those 3 picks, you will learn nothing. It will not help you in anyway to develop procedural memory. 
  6. Understand that many profitable traders are not conscious of how they develop their own trading skill and how procedural memory work. in fact most would not have even heard of procedural memory unless they had background in psychology or are involved in training. If you want to understand more about procedural memory ask Reaper Trader . His Masters Thesis was on that subject. 
  7. Understand that profitable traders can not verbalize the process they follow. Procedural memories are implicit memories they can not be easily verbalized. A person who possess a skill in particular kind of trading may not be aware of steps he or she is following. Psychologist and those who study procedural memory use special techniques to build procedural maps to understand such skills. Often you will read a interview or watch a interview of famous trader and you will see that the person does not tell you much about his process. Often they give you generalities , why because they are not aware of their own procedural skills. I recently read a book by a trader who is pretty well known amongst prop traders and day traders and recently wrote a book about it. Now the book is extremely disappointing to many highly skilled traders  because it fails to explain the process. It has tall stories but when it comes to actually the meat of explaining the process the author fails miserably. Why because it is difficult to verbalize a skill like tape reading. 
  8. Understand that once you develop procedural memory it is on auto pilot and it is lifetime skill. The bodies mechanism for handling procedural memories is for survival reason. If we did not have way to develop procedural memory we would not be able to perform any skilled task. In the absence of procedural memory you would be trying to remember steps of a skill and the method involved in performing task every time you perform it. Think of how your life would be if you were to drive like you were driving for first time every time you drive a car. Procedural memory primarily allows you to avoid short term memory overload. 
  9. Understand that most activities which make you money in your life involve procedural memory. Your procedural memories earn you your leaving. If you are a doctor, nurse, dentist, lawyer, teacher, firefighter, marine, actor, singer, dancer, software programmer and so on, what makes you money is your procedural memory. It is not knowledge that makes you money, it the "ability" to convert that knowledge in to some "professional skills" that makes you money. There are many people with superior knowledge but they can not make a living. In any field you will see that the people who earn higher amount of money have more refined procedural memory. Procedural memory is not specific to trading.
  10. Understand that procedural memory is not developed through hardwork. There are many hardworking traders but they do not necessarily make lot of money. Why because they may not be having right procedural memory. In fact once you develop procedural memory you don't really need to work hard. that is the essential role of procedural memory.




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Do you have a trial?

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2 comments:

Paul said...

Fantastic post. One of my favorites even though I doubt many will fully grasp and do the specifics.

Pradeep Bonde said...

Thanks