The Life Cycle of the Typical Trader

The Life Cycle of the Typical Trader

This is a GUEST POST from Rolf @Tradeciety.

The exciting start

Do you remember how you got started in trading? Everything seemed possible, and you were ecstatic about the possibilities that trading offered, but what happened afterwards? This article will help you understand the different phases almost all traders will go through, why they are stuck in the same routine, and where they go wrong. It will help you avoid making the same mistakes, and save you some time along the way.

The indicator phase

When traders start out, most will start by using a variety of different indicators. After all, indicators look very sophisticated, they provide a very clear signal, and they transform what you see on your charts into easy to digest information.

New traders don’t really know what they are doing, and don’t understand what the indicators tell them; they just look for trade signals without having ‘to do too much work’.

The price action phase – less is more

When traders move on, they adopt the ‘get rid of the mess’ approach, and use phrases like ‘keep it simple’ or ‘only trade what you see’. Price action trading, and looking at blank price charts is where they will go, because price is ‘the purest form of information’, or at least this is what people tell you.

After leaving indicators behind, traders report that they feel free, and can finally see beyond the indicators. They understand what is really moving the markets. Needless to say, it does not really matter whether you are using price action or indicators – but this insight will come much later, if ever, in a trader’s life cycle.

Higher timeframes – less noise and more time to enjoy your freedom

Lower time frames are so noisy, and even though your trading strategy might be profitable, it is disproportionately harder on the lower time frames, isn’t it? A typical thought in this phase goes something like this:

‘When I finally trade profitably on the higher time frames, which is easier, I have more time to enjoy life; the reason I came to trading in the first place.’

Every time frame is unique, and the characteristics and skill-set you need to have for each time frame differ significantly. Traders who switch to higher time frames have to deal with completely different emotions. If you tend to make impulsive trading decisions and have difficulty executing trades with patience, trading time frames where you have to wait weeks for a signal to be validated, or stay in trades for days and weeks, and withstand drawdowns calmly, will often result in a whole new set of problems.

Fundamentals – understanding the context

Next, traders start reading news articles and learning about macroeconomic figures. They try to understand the overall market sentiment, since this is the actual factor which is moving the markets.

The fundamental phase is usually short, since traders notice relatively quickly how difficult it is to understand fundamental data. It isn’t as easy as trading absolute numbers of news releases.

Automation – removing the personal mistakes

EAs, trading robots and automated trading strategies seem like the perfect way out. They remove the personal factors that are responsible for trader failure. You get rid of emotions, avoid impulsive trading mistakes, and stop unnecessarily messing up your trades, by fully automating your trading approach.

Traders usually underestimate the factor that markets are never the same. The fact that financial markets are constantly changing, going from trending to ranging mode, having different phases of volatility and even the way markets respond to price behavior and other trading tools changes, is causing major problems for automated trading strategies. They require constant monitoring and adjusting the algorithms.

Back-testing – Finding what has worked before

After some frustrations, and without really seeing any improvements, traders usually start backtesting different trading ideas excessively. Before they are ready to invest more money, they want to make sure that their approach has worked before and, therefore, has a higher chance of working going forward; at least theoretically.

Back-testing, similar to automated trading, underestimates the changing nature of financial markets. Furthermore, backtesting avoids a variety of common issues that traders have to deal with during live trading which include: executing patience, feeling the pressure of having real money on the line and seeing the whole context of financial markets. Needless to say, backtesting results (almost) never translates into actual trading success.

Completing the cycle

Giving up

Most traders will go through this cycle once and then have enough and give up. Studies of retail trading data confirm that 40% of all traders quit after one month and a staggering 80% of all traders quit after 2 years.

The reason is that their dreams and hopes about fast and easy money have been destroyed, and they come to the conclusion (without losing lots of money, hopefully), that trading is not the easy task they were looking for.

Repeating the cycle

The ones who do not quit and keep on chasing their dream will repeat the cycle over and over again. However, traders will alternate between different phases of the cycle, leaving out some completely, and stick to others longer.

Adopting a professional and serious approach

At one point, some of the traders that are still left will come to the conclusion that they need to escape this cycle and try a different approach. Trading without the belief in the Holy Grail, and trading detached from the get rich quick mindset, often enables traders to tackle the whole situation in a completely different way.

Once traders stop system hopping, start implementing a trading plan and a trading journal and pay attention to detail, they have a chance of making it in this business. By understanding that the markets are not your greatest enemy, but that you yourself and your wrong beliefs are the factors that are causing you to make the wrong decisions, you can finally start focusing on the important aspects.

Our tips for a professional trading approach:

The Life Cycle of the Typical Trader