Visualization of Trading Performance Progression

By Lawrence

In the first part of this series, I have explained that majority of traders have a misconception of the way trading skill is developed over time. That misconception leads to wrong expectations from the progress in their trading performance. The wrong expectations contribute to driving the traders in all the wrong directions to look for improvement in their trading skills and trading methodology.

I am going to present a much more reasonable visualization of trading performance progression here. By understanding how traders really progress with their trading skills relative to their trading performance, it is possible for the traders to work on their trading skills with much more reasonable expectations and planning. That also opens the door to better chance of survival until achieving profitability.

Note: This is 2nd Part of the eBook Is Day Trading For You


The Simplified 2 Dimensional Visualization of Trading Performance Progression

Following is a simplified 2-dimensional view of trading performance progression.

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The tree structure above represents the basic trading performance progression (and distribution) as affected by various factors (each factor is represented by the branching from all of the possible states from the last factor). The tree is fractal like with its dimension between 1 and 2.

Every person starts with certain qualities or characteristics that will shape how they perform in any competitive activities initially. If you are born with strong frames and more muscle mass, you have the advantage in becoming a better sportsmen than someone who are not. If you have better dexterity than others, you will perform better in sports requiring better precision. Same goes for trading, the qualities you bring into trading will determine your starting point, there is no exception.

Look at the picture above, consider the end points on the tree structure as the different starting points for different persons given the characteristics they have when they first learning to trade. Some people, because of one specific personality trait, can help them start on an easier path and save them lots of trouble from struggling to making money in trading. Some others, without the proper combination of personality traits, would have to start from disadvantage positions learning to trade.

For an experienced trader, the same illustration can be used to explain the reason why one minor change with your way in interacting with the markets could significantly impact your trading performance. You may think that one minor change is just fine-tuning of your strategy. But if you can think in terms of the performance tree, you would know that the change you made may swing you to a completely different branch of the tree. Thus, you may have put yourself up for much better (or worse) performance due to lack of understanding how important that particular component is within your original strategy.

The Better 2 Dimensional Visualization of Trading Performance Progression

Now, let’s consider a slightly more complex visualization when more factors are considered in one’s trading performance progression.

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Once a trader has walked down a path driven by his characters and trading methods, certain boundary would have been established. The trader is essentially trapped by an invisible net which limit the performance. Visually it is one of those branches you see in the picture that extended horizontally.

For day trading, the 1% who keep winning consistently over time, they are the ones visually extended to the top of the tree. According to the studies, their performances are so strong that they outperform even the next 1% group completely. Only the players who are best suited for the task, or those who are extremely lucky, can consistently extract money from day trading. For the rest of the traders, it is really a waste of effort to pursuit day trading unless they can eventually behave like the top 1% day traders.

This particular type of eco-system where only a very small number of members outstrip all the other ones in terms of reward is actually very common. The Hollywood industry is famous for extremely good payout to the top actors and actresses while majority of their peers are struggling to make ends meet. The competitive professional poker games is another good example where the winners take all. In natural, the top of the food chain species like sharks and lions are very small in number comparing to the preys they took throughout their lifetimes.

Refinement vs. New Direction In Trading Skills

It is not easy to figure out what components within the set of your trading skills or personality traits can be refined. Those that can be refined are the ones that will not rock the boat, hence they only affect the trading performance by a percentage deviation from your current approach. Visually, they are the branches closer to the edge of the tree. Changes to these components do not make much difference to the path you have been following all along.

Those factors that are closer to the starting point of the tree are the core factors which include some of the fundamental personal beliefs of the trader. These factors do not really allow the trader to refine them. A change of these factors will swing you onto an adventure because you just back tracked away from a path that you have spent so much time getting comfortable with. In essence you have switched to an almost completely new path that you have no understanding at all.

Visually, we are talking about spending years of trading skill development along one side of the tree (e.g. scalping is the best and I must scalp to win) and then all of a sudden, your core beliefs changed (e.g. big money is made from the swings and now I have enough capital I have to join the big boys club). All the prior trading experience developed before the change is not applicable to the new approach at all. It is easy to imagine the blow to the confidence and performance of the trader.

What We Can Learn From The Top 10% Swing Traders

When the trading arena is outside of the day trading timeframe, the top 1% performers are still going to outperform the rest by a wide margin. But instead of the rest of the 99% all losing money, it is now possible for the top 10% retail traders to be profitable. What makes it 10 times easier to make money through swing trading?

One big difference between day trading and other forms of trading is the luxury of time. Day traders have to make trading decisions quickly or whatever trading opportunity they identified will be gone quickly. All day traders know that the difference of 1 to 2 seconds of your entries could very well decide the outcomes of your trades. This means day trading is a pressure pot where the traders have to make their trading decisions not just correctly but also quickly in order to make money. No wonder the top 1% winners take all.

In swing trading and longer term trading, the influence of emotion and character issues that determine the winners in day trading can be contained or eliminated through longer decision making process. The longer time allowed for the trading decisions helps the traders by allowing them to enforce their commitments and determination to follow through with their trading plans. This luxury of time gives the top 10% swing traders a chance to utilize their analytical skills, resulting in profitable trading.

In short, the performance statistics on day traders and swing traders prove that in day trading, the traders’ personality traits play a dominating role in their chance of success.

Trading Skills Is All Relative

Remember that trading performance is not an absolute measurement of your trading skills. It is all relative to the ones trading against you and with you.

A good example of relative skill influence is the first Internet dotcom bubble back in year 1999-2000. Those who adapted to the environment to chase momentum of the high flyers performed well until the bubble burst. Those who performed badly because they are conditioned to trade range bounded market in early 1990s suffered. The best seasoned traders did not perform as good as the retail traders because they have straight money management but they still pull off good money back then.

Majority of those retail traders went broke afterwards but their euphoria during 1998 to early 2000 was the optimized trading method for the time. These retail traders performed best among all the traders because their strategy and mentality was the strongest combination for the environment at the time, relatively speaking.

At the opposite of the spectrum, even if you are trading as good as some legendary traders in the past, your success is not guaranteed. As long as your peers are trading as good as you do, you are not in the 1% of the arena you have chosen. Your chance of success will still be very slim.

In trading, you do not beat the market … you beat the others to collect the loot.

The Path To Day Trading Success Is All In Your Head

Many traders believe that if they find a holy grail trading setup they will be on the path to successful day trading. As I explained in Having A Trading Edge Is Not Enough, that is not the deciding factor for consistent trading success. Things are more complicated than that, as usual.

Majority of traders are not aware of the weight of their personal beliefs within their trading performance. They were told to be resilient, to never give up and not to let their ego get the better out of them. The catch is that even for the ones who can react correctly in adverse scenarios, only those who can react the fastest or recover from setback the quickest can win in day trading. The reason is that there is only so much time available and those who can deal with the unfolding of uncertainties with confidence and speed win.

Trading firms love to hire young traders and pick out those who have the right personality profile for tryout. They do not really care if these kids can make money on their own. They care if they can make money for the firm given the structure and support provided by the firm. What they are looking for are the rare combinations of top performers in these young traders so that they can produce for the firm.

As retail traders, you either have what it takes right from the beginning to become a good day trader or it will take time. Time is needed for you to mature enough to control your emotions, to overcome your personality weaknesses that can damage your trading performance and to discover the strength within your character that can be leaned on for winning strategies. Think of the tree of trading performance progression again. Those who seek to become profitable in day trading are seeking for a combination of trading methods and personal traits that will propel them to the top of the tree.

That’s why some people can do it quickly while others take years. Quite a number of famous traders reportedly took them 10 years or more searching before they became profitable consistently. Of course there were a lot of dead ends they ran into. And of course there were a lot of stupid pursuits. An observer can easily point out that many of these mistakes and time wasting activities can be avoided.

I dare to disagree. My take is that majority of these mistakes made by these successful traders are absolutely necessary in shaping them into who they are. They are the ones who learn from their mistakes and continue to move on. This quality in their personality, together with their perseverance, make it possible for them to achieve what they set to accomplish, success in trading.

Goal Of Trading Is Often Forgotten

Traders who struggle with day trading should seriously think about the cause of their troubled performance. If performing under pressure is not your thing, why force it when you can profit handsomely from swing trading instead?

To pursuit day trading and winning in the game, one has to become the top 1%. Only certain personality traits in combination of matching trading methods (including mechanical models) will allow the trader to make good money from day trading the markets. They do make good money indeed because they beat the other 99% retail traders.

For one to stay profitable in day trading over a long period of time, it takes the ability to adapt to the ever changing environment quickly. This flexibility in adapting to the environment requires yet another set of specific personality traits to achieve. Hence it is another hurdle to overcome if you plan to make day trading a life long career.

The goal of trading is always just making money. If you even try to modify this basic tenet in your dictionary, you will fail in trading. Since there are so many markets to choose from and so many timeframes outside of the day trading domain, is it really necessary to compete in the toughest arena knowing that you have much better chance to make good money else where?

Read Part 3 – Kick Start Your Day Trading Career – The Right Way


Comments
  • melvyn May 3, 2014 at 9:52 pm

    Excellent article as always

  • Minty415 May 4, 2014 at 4:40 pm

    Great article series. I 100% agree that most successful traders got to that level from making those mistakes you’ve mentioned and learning from them. It does not mean they do not ever make mistakes anymore, but they have build up the right mindset to quickly identify that it is happening on the spot and control it before it has an adverse effect.u

    • Lawrence Chan May 5, 2014 at 3:57 pm

      The mentality that one can study a course and then perform well in day trading is absurd.

      If it is true, that method will be so popular that it will become useless quickly.

      That’s why the hot trading styles come and go. So do the traders who cloned their trading techniques from some instructors.

      Swing trading, however, has many tried and proven strategies that can be done mechanically.

      But they are not as sexy as day trading, isn’t it?

      • Minty415 May 5, 2014 at 5:46 pm

        The people selling courses don’t want to tell the truth, and they are likely not successful themselves. I interact with a lot of traders online, and never has one person told me they got successful from buying a course. There are very few consistently successful ones and they ALL failed at one point or another, while spending years suffering both financially and psychologically. Trading a demo account also does not help much, since it’s human nature to react differently when real money is on the line.

        Integrating swing trading / options, not leveraging and trading proper size relative to portfolio, and having a flexible full-time job where I can work from home were some of the things that really helped me.

      • Lawrence Chan May 6, 2014 at 2:25 pm

        The good courses will help because they give you a foundation to build on, to grow from.

        But the expectation of the traders learning from these courses, however, are driven pretty high which is not necessary the fault of the trainers. After all, you cannot sell a course without promising a bright future these days …

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