Evolution of Traders

Introduction

Every Trader goes through the following stages of evolution - Basic market reading - is the market going up or down? Note, that at this stage, very few people think of the third possibility.....that the market could be going sideways. Setting targets for the envisaged move - During this stage the person is happy if the market moves in the envisaged direction and even if the market comes just close to the target but misses it. Getting to know Technical Indicators and Tools, thinking that knowing the tools is the secret of successful trading. During this period, the person is focused on "being right", the mentality is "me against the market", or even, "my forecast is better than yours". The person trades during this period, experiencing both profits and losses, but consistent profits elude him. He is happy every time there is a profit, no matter if it be small and tends to forget about the losses.

Slowly, the Trader moves onto the next plane of evolution, wherein - He starts to think about various possible scenarios....and starts to think in terms of "If-Then-Else". He starts to think in terms of Probability....what are the chances of the IF or the THEN or the ELSE happening. Starts to think in terms of Risk-Reward.

Having mastered this higher plane, the Trader can then move on to the next plane. Thinking in terms of strategy, Managing multiple positions

There are distinct stages of trader evolution: discretionary trader, technical trader, strategy trader. All successful traders have gone through them. It is almost impossible to be a successful trader without going through all of these stages. Every trader usually starts out as a discretionary trader. The amount of money lost generally determines how long it takes the individual to start using technical indicators to make trading decisions. Eventually, as even employing technical indicators fails to move the trader into profitability, the trader moves into the third stage and starts to write strategies based on quantifiable data. It is at this stage that the trader ordinarily starts to make money. Finally, the strategies and money management approaches are refined and the individual becomes successful as a strategy trader.


THE DISCRETIONARY TRADER

A discretionary trader uses a combination of intuition, advice and non-quantifiable data to determine when to enter and exit the market. Discretionary traders are not restricted by a concrete set of rules. If you are a discretionary trader, you can make buy and sell decisions using whatever criteria you deem to be important at the moment. For example, you can use both a combination of hot tips and relevant news stories from DalalStreet, and enter or exit the market based upon this information. If you begin to lose money, you can immediately exit the market and change your trading method. You don't have to use the same techniques day in and day out. It's a very flexible way to trade that you can customize based on what you think the market is going to do at any given moment. Fascinated by the markets, the discretionary trader is ready to put on a trade at a moment's notice. The most uncomfortable part of trading for the discretionary trader is when there is no action. So he will jump on any piece of information, anything that will permit him to take a stab at the market. Above all, he craves the action.

INTUITION & HOT TIPS

The discretionary trader uses several sources for his trading decisions. One is intuition, for example, I see a lot of people in stores, so I think the economy is good, and earning will increase, so the stock market should go up, and I should buy Retail stocks.He usually spends a lot of time talking to his broker. Hot tips are a common way that a discretionary trader gets ideas. A call from his broker or good friend, or a tip from a discussion at a cocktail party are all places the discretionary trader gets his trading ideas.

CRAVES EXCITEMENT

What a discretionary trader loves is the excitement. He loves being in the markets, playing with the big guys. He craves the risk, the excitement of trading, and the gambling rush that he gets from calling his broker and putting in the order to buy. Discretionary traders retain the flexibility of changing their buy and sell criteria from moment to moment, and change they way they trade from minute to minute and day by day. They don't have any discipline, nor do they think they need any. They use their intuition and their gut instinct, and feel justified in doing so. They think, Making money is easy, you just have to be smarter and quicker than the next guy.

It is after enough money has been lost that the discretionary trader in some way stumbles across technical indicators. It may be from the chart book he just looked at where there was a Stochastic Indicator underneath the chart. Or he may have gone to the latest Make a Million Dollars Trading the Stock Market seminar and found out that using the Relative Strength Indicator is the sure way to stock market profits. He thinks, So this is how they do it! These indicators look like magic. They add some rationality to an otherwise irrational trading style. He thinks, This must be how the big money players make the big money they use technical indicators!

DISCOVERS TECHNICAL INDICATORS

Once the discretionary trader discovers technical indicators, he or she incorporates some rudimentary ones into trading, usually as additional justification for making the trade. These newfound technical indicators give the discretionary trader a new lease on trading. Now our trader has a whole new world in front of him the world of technical trading. For a while, this newfound world combines with intuition and the discretionary trader views himself as a strategy trader. He says, I trade a strategy using moving averages and Stochastics with a dash of daily news and tips from my broker. I am now a real objective strategy trader. While the trader may view himself as a strategy trader, this could not be farther from the truth. The discretionary trader's style is still undisciplined, based on newly educated guesses, and he is probably still losing money. For a moment, these technical tools were thought to be the answer, and while they add a little more rationale to his trades, the losses continue to pile up. Despite his continuing angst, our discretionary trader is now on the way to becoming a technical trader.