There are, generally speaking, 5 distinct stages of progression among Forex traders.
Each stage centers around a certain set of beliefs, and as the trader grows, he sheds them and gains new ones that propel him forward.
Here are the 5 stages, listed according to increasing levels of expertise:
Stage #1 Copying
In the first stage, the beginner trader unthinkingly copies what he sees. He takes a few Forex trading courses, reads a few books, visits online forums, and blindly copies the trading systems he comes across.
At this stage, he is at the mercy of his peers/teachers because he is completely clueless. He can’t tell the difference between good and bad trading advice.
A popular approach is to fill one’s charts with colorful technical indicators and trade with the ones that look the most appealing.
Trading is ultimately a skill to be learned. And since this person is simply copying others, he is not yet truly learning how to trade.
A trader at stage 1 thinks, “What’s the fastest way I can make money and have fun?”
Stage #2 Compiling
In the second stage, the trader actively searches for new trading techniques.
He compiles lists of tips and tricks, with each one describing a fragment of what constitutes good trading behavior.
This is where he acquaints himself with cliche trading tips, such as:
- Trade with the trend
- Cut losses quickly
- Let profits run
- Don’t risk more than 1% per trade
- Only take trades with a high reward-risk ratio
Sometimes, such tips work well. Other times, they don’t work at all. In either case, the trader does not yet understand why they would (or would not) work. Thus, he is unable to choose one “tip” over another, since they aren’t effective all the time.
Many retail traders are stuck in this stage and never progress out of it. Incidentally, this is also the stage that most “trading education” websites focus on.
A trader at stage 2 thinks, “I have a lot of information, but I don’t know how it all fits together!”
Stage #3 Computing
In the third stage, the trader has some practical trading experience and develops a rudimentary understanding of how certain “tips” relate to certain market conditions. However, he is still largely operating from a theoretical perspective.
With a theory of how the market moves, he comes up with a trading plan by pairing certain “tips” together. He executes the plan, but remains unprofitable.
After repeated attempts, the trader either accepts his theories as too rigid and progresses on to the next stage, or remains stuck in a cycle of trying to systematically fit the market into new theories.
A trader at stage 3 thinks, “This method should work in theory. Why isn’t it working now?”
Few people ever move beyond this stage.
Stage #4 Coordinating
This is the expert stage. The trader finally realizes that the market cannot be consistently traded with fixed rules.
Thus, he coordinates different sets of “tips” to achieve specific objectives. He understands why some “tips” work better than others, and why most only work under specific market conditions.
Eventually, the trader realizes that strategy is choosing what not to do. He learns that winning is largely about knowing when to stay out of the market.
In this stage, the trader survives by knowing how to tweak aspects of his trading method to suit various market conditions. This is when he begins to attain consistency in his performance.
A trader at stage 4 thinks, “My trading edge is my discretion.”
Stage #5 Creating
The fifth stage is the stage of mastery. The trader is able to design entirely new ways of trading from seemingly unrelated concepts. What was previously important now becomes unimportant and vice versa. This usually manifests as a “return to the fundamentals”.
A stage 5 trader knows exactly how each aspect of his trading “system” contributes to his goals, and eliminates all other unnecessary components. This is often confused with the cliche of “simplicity”, where less sophisticated traders wrongly assume that the fewer technical indicators used, the better. In the mastery stage, “simplicity” really means “the right amount of the right things”.
At the highest levels of mastery are traders who create trading opportunities seemingly out of thin air. They are able to move outside their usual trading setups to identify high probability trades in situations that most traders avoid. Such feats require a bright mind, hard work, and ample market experience… but the rewards are high.
A trader at stage 5 thinks, “It doesn’t matter what the markets do this week. I’ll still be profitable.”
Moving from stage to stage
The first stage (Copying) focuses on chasing an objective (i.e. profit). The second and third stages (Compiling and Computing) correspond to following a plan. The fourth and fifth stages (Coordinating and Creating) is centered around defining and applying a strategy. The difference between a plan and strategy is that the former comprises a goal and a sequence of actions, while the latter includes guiding principles.
Moving to each subsequent stage requires an increasing amount of market experience, creativity and introspection. The more you are willing to question your beliefs about trading, the faster you’ll grow.