The 4 Stages of Trader Development

By:

James Knight

James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.

Updated: Oct 12, 2022

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Throughout my trading career, trading psychology has always been an interest. I believe that it’s the most important factor in trading. Strategies are everywhere (see the basics of my forex and stock day trading strategies), money management rules are everywhere, but most traders fail not because of lack of available information (or even misinformation–also a big problem), but because of lack of discipline, patience, or other traits which all fall under the broad spectrum of “trading psychology.”

In Mastery, Robert Greene describes in detail the path to mastering anything, and indicates that it takes about 7 years. You may be proficient (profitable) at something well before you master it, but to truly master something takes about 7 years. This aligns with the research pointed out by Malcolm Gladwell in Outliers; it takes 10,000 hours to attain mastery in a field (that’s about 5 to 6 year working full-time).

There are of course exceptions, and even putting in this amount of time doesn’t guarantee mastery.

The point is that traders often make the mistake of thinking very early on that they know more and are better traders than they actually are. There are few quicker ways to lose money in the markets than by lacking humility. As indicated though, you can start making money in the markets before you become a master. In How Long It Takes to Become a Successful Trader I outline that it typically takes most people who attempt trading about a year before they start to see consistent profits.

There have, and continue to be, times where I thought I understood something only to find out I didn’t. By understanding the 4 stages of trader development it is possible–if you are honest with yourself–to slot yourself into a category and see how much further you have to go in your market studies. Simply by understanding the stage you are in, and accepting it, you may be able to speed up the mastership process by avoiding common pitfalls.

These four stages are based on general psychology and highlight how humans gradually learn, incorporate and master various mentally challenging endeavors. Use the four steps to gauge your progress in other, non-trading endeavors, as well.

Trader Development Stage 1. Unconscious Incompetence

This is the starting point. We know nothing, and are also unaware of our own ignorance. It’s a dangerous time. It’s a time where we’re driven by impulse and personal tendencies. We read an article on a trading strategy, and it looks awesome, so we read a few more and feel we have a good grasp of how to trade. We open a small trading account and proceed to lose the money. Usually after a few lessons like this–if you are lucky you only lose ‘play money’ in a demo account–we realize there may be more to trading than first meets the eye, and we require more study (stage 2).

Stage 1 is also generally the perpetual state of the “trading voyeur.” This is the person who dabbles in trading, maybe makes a few trades (or many) here and there, likes to read business news, talk about the market, and monitor forums looking for quick trading tips, but never takes the intentioned steps of diligent research or market study. Trading signal providers thrive off those in this stage 1 and stage 2.

Trader Development Stage 2. Conscious Incompetence

Being able to admit you don’t know much, usually after some costly mistakes, means you have entered the second stage of your education. This is where a very large group of traders will sit, and where most traders spend a lot of time. They understand they are missing a piece(s) of the puzzle because they aren’t seeing results, but don’t know what to do about it.

You are aware of pitfalls, and to put it bluntly, you’re aware of your own incompetence. Harsh as it is, this is a very powerful step. Being able to admit incompetence opens the door to further knowledge.

It is then up to you to study, research and practice (see Best Way to Practice Day Trading) so you become aware of what it is that you don’t know. You must then be open and humble enough to accept what you learn, but also strong enough not just take everyone (book/article/video/course) at their word.

This stage is tricky. You may have periods of great returns, possibly even years in a row, but it is still very possible you haven’t left stage 2… or you may be moving back and forth between stage 2 and stage 3. After a period of success you’ll feel confident, so you may start making subtle (or drastic) changes to your strategies, lose interest in trading, or face some other obstacle. Ultimately, the success you once thought would never leave does leave (regardless of reason), and now you need to find it again. This is a lesson as well, it just takes longer to learn, and it usually isn’t an education you get from a book…it is something you need to live through.

Trader Development Stage 3. Conscious Competence

After a lot of study, work, testing, and practice you finally have a solid trading plan, you’re well capitalized, you know how to manage your money and trades, you have verified and tested strategies, you are aware of personal tendencies and how to control them, you are no longer searching for a holy grail and instead just trust the method you have, you aren’t swayed by others opinions, don’t gamble, and don’t risk too much on each trade.

At this stage, you have learned your lessons and are now simply focusing on implementing your trading plan as best you can. You may have people who help, such as a trading mentor, but ultimately you realize that successful trading is up to you. It’s you who needs to remain aware of what the market is doing so you can implement your trading plan in real-time.

This is still a learning phase. You now know what you have to do, and you are learning to implement that knowledge in real-time, with real money, with very few deviations.

IF, you have gone through this process, created a trading plan and diligently follow it, simply by repetition you will reach stage 4. Following a plan isn’t as easy as it sounds though; it requires you handle your “personal demons” such as impatience, lack of discipline, as well as control your fear, hope, and greed. A study of trading psychology, or simply psychology in general, and personal reflection will play a significant role in this stage of trader development.

Trader Development Stage 4. Unconscious Competence

This is the mastery stage. You have incorporated all that you know (and discarded a lot of BS and false beliefs) into a trading plan, and can now execute that plan on “auto-pilot.” You no longer have to wrack your brain deciding on whether to take a trade or not, and you don’t need to refer to your trading plan for verification of anything. Like a professional golfer who has hit thousands upon thousands of golf balls to create muscle-memory, through loads of practice and making the same trades over and over again you too developed a type of trading muscle memory.

The path may not stop here though. You may choose to develop new strategies and test those, as well as experiment with new trading systems. For these new methods you will go through a learning process, usually starting at Stage 3 again, but that is only for that new strategy. You still retain all you have learned, and therefore have the ability to easily come up with new ideas and refine your processes.

Here is a test to see if you are step 4. If you feel stressed about your trading, while trading or when away from it, you haven’t reached stage 4. At stage 4 trading becomes almost completely stress-free. Although, your heart rate may still increase at times since you can’t know the outcome of each particular trade–that still remains a surprise. You know your systems well, and have been through enough ups and downs that you have a detached-humble-confidence that the profits will take care of themselves if you follow your plan. And you also have a detached-humble-confidence that you can execute that plan easily, since you have done it so many times before, in all types of market conditions.

At no point does a person get to relax and stop doing all the things that got them to stage 4 in the first place. You need to maintain and continue to implement all those traits and lessons you picked up along the way. Slack off, and your trading will still suffer.

Developing Traders, Good to keep in mind..

Masters make trading look easy, but that’s only because they have put in the necessary time and effort to make it look easy. To an onlooker, this can be very deceiving, because if you haven’t put in the time and effort, then it won’t be easy. If you have a mentor they may seem very nonchalant (detached-confidence); they don’t have a trading plan printed out; they only work for two hours a day, etc. The novice trader believes they too can simply skip ahead and do exactly what the Master does. This won’t work though.

In order for it to become ‘easy’ for you, you need to go through the whole process, and yes, it will likely take several years.

While you may master trading, there are always other challenges. Even an unconsciously-competent Master (stage 4) will face periods of trial, often unrelated to trading, but which affect her emotionally and therefore she must learn how to juggle life problems with trading. Life, and its problems, don’t stop just because you get good at something. It is a continual process, but once you have reached stage 4 that can’t be taken away from you. You’ll very likely be able to face new challenges and obstacles with less difficulty, and be able to overcome those obstacles and get your trading on track relatively quickly because you have been through it (or something similar) before.

For New Traders…

This may seem discouraging, yet by understanding the process my hope is that you can avoid some of the common pitfalls which make becoming a successful trader such a long process (and remember, profitable trading will occur before mastery). Be honest with yourself about what stage you are in so you can manage your expectations (see Why Day Traders Make Big Returns But Aren’t Millionaires) and avoid burning out on your way to your goal. Always manage risk; risk less than 1% of your account on each trade, so that even while you are learning your capital won’t be significantly depleted by a string of losses.

This IS the process you will go through in learning. Pretending it isn’t only delays process. Admit this to yourself and start/continue your research and personal journey.

“Experts Status”

A trader recently asked me some questions as they were starting to improve. I had these words to say about being an expert:

The process of becoming an expert is exactly that ….a process. A destination is never reached because the only goal is to do what needs to be done in the moment. And that is always a challenge, so an “expert” is just someone who is better able to stay in the moment than others, and do what they are supposed to do (planned and practiced for). There is no end. As soon you start to think you have the market beat, you take yourself out of the moment and your trading suffers. So an expert is someone who practices to relentlessly stay disciplined and in the moment while they are trading…and does it. I don’t know anyone who does this ALL the time…but most of the time is all you need to be an “expert” and a good trader. I find it is like a muscle though. When I quit trading for a while, when I come back I need to rebuild my discipline of sticking to my plan and executing my trades effectively. It is a continual process…which is what makes trading so much fun.