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Taking Your Trading to the Next Level

A really interesting question came in overnight from a trader who is still relatively new to it all, but who has achieved a fair level of success.

Hi John,

I’m a long time listener, first time caller. I started reading your blog when I first learned how to trade. I’m now at a point where I’ve found a system that’s suitable for my personality and has a predictable success rate. Although I still make mistakes sometimes, I’ve been disciplined enough to be profitable for the past 3 months.

My question has to do with maintaining high level of performance. I’ve only been trading for about a year so there’s a lot that I don’t know. In my head I often compare traders as athletes, where skill is necessary to compete and win. In sports there’s always the “next level” (high school to college to pros, etc.). What is the “next level” in trading? In the past 3 months I’ve made 5-10% monthly return. Should I strive for 20%, 50%, 100%? Should I set my goal to increase my win percentage?

Also, back to the sports analogy, athletes spend their time practicing when they are not competing. It is crucial to keep their skills sharp. Right now I spend 2-3 hours per day trading the four-hour and daily charts. How should I spend my time outside of those 2-3 hours? What can I do to keep my trading skills sharp?

Thank you very much in advance.

Kind regards,

Andre

The first thing I want to point out here is that Andre says right off that he’s found a trading system suitable to his personality. This is key. It’s probably the one thing new traders don’t understand about being able to reach a level of sustainable performance in the markets. If you’re system doesn’t fit you then at some point the conflicts are going to create problems.

Now, as for the comparison of trading to athletics, it’s certainly often made. I’ve done so myself. There are some differences in this context, however. Much of what athletes do with their constant training is to maintain or improve their physical attributes. Clearly, that isn’t something traders really need to worry about. It’s not like clicking the mouse is physically demanding, after all. The other side of things in terms of working to develop new skills and/or refine existing ones is relevant, though.

Taking the physical element aside, athletes work a lot on getting better at what they do in a few different ways. The most obvious is training – practice repetition. I don’t think I’m going too far out on a limb to say that Andre probably doesn’t need to practice using his system. What he may need, though, is the other side of what athletes do for development. That includes things like reviewing their performance on video and getting input from coaches. Performance review is definitely something which can help traders.

An important part of any trader’s development is monitoring their performance on an on-going basis. At its most basic level that means making sure you’re doing what you’re supposed to be doing according to your trading plan. If not, then you know you need to work on that as a first priority.

Another aspect to reviewing one’s performance is to look at how one’s system is doing in terms of expectations. Is the system making the trades it’s supposed to be making and/or avoiding the ones it isn’t supposed to make? If not, then the question of why needs to be addressed.

This is not to say that skill development isn’t a part of trader development. Experience will certainly make you a smarter trader over time, but there are other things which can be done along the way. Learning new methods of analysis can be part of that equation. Doing trading system research is another possible path, depending on your needs and interests. It’s almost always worth at least exploring ways you can improve things like risk management and market analysis.

As for Andre’s question about what the “next level” is, I’m inclined to lean against focusing on the rate of return itself. More important for just about everyone is making incremental improvements to following their system, avoiding errors, and the other sorts of things mentioned above. That will often translate into higher returns, but returns aren’t necessarily the most important consideration. Sometimes better trading means lower drawdowns and/or a smoother equity line overall.

In fact, taking it to the next level can mean a number of things which don’t relate to performance at all. It could mean trading with a large account. It could mean expanding the number of securities and/or markets you trade. It could be shifting to more advanced trading strategies, like employing options. The bottom line is that the next level is what you decide.