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How to develop trading exprtise

Posted on 1/15/2010

The primary challenge in trading is of expertise development. To trade profitably, you need an expertise in a particular setup. If you want to trade Episodic Pivots successfully then need to become an expert in it. Or if you want to trade IBD 200 method or momentum trading you need to become expert at it. Trying it out or couple of days does not make you an expert.

If you understand the process involved in becoming an expert than you'll find it easier to become an expert.

What is an expert

Layperson uses the term expert loosely to describe anyone with superior knowledge or skill. 

Psychologists use the term expert  to refer to an individual who is significantly more experienced than others in performing a particular task. 

Expertise is task specific.

How do expert develop such expertise?

Psychologists have studied expertise development and experts in various fields and today there is a very good understanding about what makes an expert a expert. 

Psychologists have found that expertise is developed through encapsulation.Encapsulation is a process whereby the adult learner's cognitive energies and skills become focused on a specific areas. 

The outcome is cognitive efficiency. As a result of the process new ways of thinking develop in the brain. Brain becomes extremely efficient at performing the task. 

There are  many  differences between experts and novice

The difference between experts and novices cannot be reduced solely to experience.  There are at many qualitative differences between experts and novice.

Novices rely on formal rules and procedures to guide them. Experts rely to a greater degree on their accumulated experience

Absence of such a accumulated experience creates problem for novices, this problem can be overcome by studying historical examples.  If you study thousand examples of past swing trades or Episodic Pivots trades then you will have a better accumulated experience. 

As a result of such deliberate study next time when you are taking a trade you will bring the accumulated experience of 1000 plus trade to your trade. 

Reduce the load on cognitive process 

Novices are highly conscious of the task performance process and the rules involved in performing the task. This task consciousness creates a load on cognitive process. 

The cognitive load theory shows that humans have very small short term memory. So when they try and do complex task where they have not yet acquired expertise, it leads to cognitive load. They are trying to remember steps or sequence or method rules. This is a distraction and creates additional "load" on cognitive processing. 

That is why they become frustrated, harried, or lack confidence. As expertise grows, performance of the task becomes automatic. This cognitive phenomenon is called "automaticity." 

In trading terms when a trader tries to trade a method like say IBD 200 after reading the guidelines here, he soon encounters cognitive load. He is trying to remember the steps without sufficient practice and thinking. He or she spends great deal of time on smaller task. As a result gets frustrated. 

Understand the cognitive load theory

Understanding the cognitive load theory is very critical if you want to become a consistently profitable trader. 

Human brain has short-term memory and long-term memory.  All learning happens in short-term memory. once learning happens, it is stored in long-term memory.  

When information is stored in long-term memory, it is stored as chunks. And when this information is recalled,  it is also recalled in chunks. This is the reason why somebody who is an expert takes many factors into consideration in a single decision. 

 As expertise is acquired, the learner's cognitive processing system becomes more efficient at processing new information. As a result, experts can see the whole picture. They are also more aware of the specific circumstances in which they are working. They have good self-monitoring skills. Experts can make even very complex, difficult tasks look easy. 

Experts use larger number of strategies

The expert has a larger number of strategies, and more effective strategies, for performing the task. This may be the most critical difference between the expert and the novice. 

Experts  have multiple strategies for dealing with the unexpected things and change of circumstances. This is the X factor. You develop this if you spend significant effort immersed in a task. 

In trading terms expert trader takes more factor in to consideration on a trade. He is aware of overall market, sector moves, phase of market, what style is working and what is not working and so on. While novice focuss on few variables.

Trading from the gut

Experts are more flexible than novices. They rely on intuition in ways that novices find difficult to comprehend.

Recently Curtis Faith came out with a book called Trading From Your Gut . The book deals with such issues in detail. 

Those who are serious about their trading will find his book very interesting. 

Many novices will find it difficult to understand or fail to grasp the significance of it.


How do I become an expert in a specific trading strategy

For a beginner trader that is the big challenge. If you want to be a successful trader you should be conscious of these processes. Study the psychology of expertise. 

If you understand the process involved in becoming a expert, you will approach your learning very differently. You will consciously follow a learning path that will lead to developing a trading expertise. 

That kind of approach will lead to life long skill development. 

First find a good setup

Expertise is task specific. So defining a specific task to become an expert at is very critical.

The first step in becoming a good trader is to arrive at a tradable setup. And then become an expert in trading that particular setup.

 In the initial phase when you're not very clear about which setup to trade,  you must look at all possibilities. 

Look at all possible options  like day trading, swing trading, position trading, macro trading, options, futures, currencies, and so on. 

Once you cast your net wide, you'll find many possible setups.  

Find a setup that suits your personality

Then you have to  decide what kind of setup suits your personality. Charles Kirk in his Twitter feed highlighted a post by Tim Knight of Slope of Hope yesterday about this. 

Tim Knight wrote a post  Finding Your trading style , that goes to the heart of the matter. He predominantly trades a bearish setup because it suits his style and personality. 

You can only trade what you believe in and what suits your style. 

Some people are inclined to growth, some are inclined to value, some are inclined towards momentum and so on. 

You have to find your style. 

Setup should also suit your capital

Even if a setup suits your personality, it should also suit your trading capital. 

Certain types of trading require large capital.  Certain types of trading is best done in a professional environment.  Certain type of trading is more suitable for small and medium-size accounts.  

Macro trading is suitable for very large accounts. Trend trading is not suitable for small accounts. Swing trading is more suitable for smaller accounts.

Or if you want to become a daytrader it is best to join a professional firm. 

Once you decide on a particular style  and a setup.  Then you must become an expert in that particular style.

Become an expert in a setup

To do this successfully you need to go into depth. If you want to become a good swing trader go into depth of swing trading.

Grab hold of every single piece of information available on swing trading. Study swing trading styles of different traders. Get in to microscopic detail of swing trading. Exhaust all learning sources on swing trading. 

Then design a strategy or model year strategy on someone else strategy.Then trade it consistently for a long period of time. if you do that then only you'll develop expertise.  

Most traders change their style so often that they never become an expert. They are constantly trying out new styles. 

Not everybody has the time and inclination and motivation to do this successfully. That is why they say in trading profession many are called but few are chosen.

The path to being a profitable trader is the expertise development path. 


The Banker said...

Great post. One thing that always helps me when learning something new is to develop a checklist of steps to get the process out of my head so I can look at the larger picture. Then I don't have to think about it.

For instance, I've already written a checklist of steps to work on the IBD 200 strategy. I've committed to this one approach. It suits my time constraints and reduces the overall market to a handful of stocks I have time to review.

This works well until I move into unfamiliar territory and then I research the next best step.

Recently, I followed your steps as you instructed for the IBD 200 and in the end the first stock I picked went down in value and I was stopped out. Going into it, I know that these instructions are not ironclad, guaranteed to work everytime.

But the great thing about that was that I also could see what happened and analyze and learn from it. The experience you talk about comes from mistakes and the more mistakes you make, the more you learn.

I think it would be beneficial also to say that a crucial ingredient is also ACTION. Had I just thought about and researched a specific strategy yet not applied it I would be no better off.

As a beginner, it's important to develop a framework to guide us so that we initially have a roadmap to follow. Without it, it's more like a puzzle. Because of that, when someone can provide you with a specific set of steps to follow, you can gain the experience you need.