Why Learning to Trade is So Difficult Compared to Other Skills
Take a look at these different activities:
On the left, we have a kid's chess tournament; on the right, the World Chess Championship.
On the left, a kid winning a science fair for their research on bacteria in space; on the right is an astronaut studying bacteria in space.
On the left, an amateur Sunday league football team; on the right, the greatest football team ever 😉.
What do we see in each of these cases?
People operate at their own level and thrive. Children compete against children, professionals against professionals, and amateurs against amateurs.
With most other complex skills, you develop in environments that match your ability level or age group. Eventually, you might progress to face off against the elites. That’s not the case with trading. You’re always in the deep end.
Imagine a child playing football competitively against Lionel Messi. The likelihood of them even touching the ball is minimal. They'd feel frustrated, helpless, and eventually give up.
The Importance of Feeling Competent
A famous study looked into how people develop expertise. It found that a critical factor was competence-based motivation. In other words, an individual’s sense of achievement drives their motivation to keep progressing. A feeling of competence leads to the development of more competence.
If that feeling of competence isn't there, the desire to improve disappears. This is what happens to many traders.
But here’s the thing… It’s not absolute competence that we need. We just need to feel relatively competent.
For example, if a beginner tennis player does well against fellow beginners, they’ll feel competent, and this will drive them to progress further. They might not recognize how far they are from the elite level, and it doesn’t matter to them either.
Developmental psychologists and neuroscientists often highlight the importance of the "Zone of Proximal Development" or ZPD. This refers to the optimal point between what learners can do unaided and what they can't. It's where we experience the right amount of challenge – not too easy, not too hard. It’s where the most learning takes place.
But this isn’t often the case for traders. You can’t change the difficulty level in the markets. You can’t be in an environment designed only for people of a similar ability to you. The markets are the markets, and they’re the same for everyone. You’re thrown in at the deep end.
Of course, you can learn using a demo account or a trading simulator, but these only reduce the financial and psychological risks. They don’t make the skill any easier or opportunities more obvious. It’s still the same market.
So, how can we gain the feeling of relative competence? It all comes down to our focus measures of success.
Inappropriate Comparison Kills Our Motivation
The psychologists Duval and Wicklund conducted ground-breaking research in the area of self-awareness. They found that the more self-aware people were regarding their performance, the more they would compare themselves to the 'standards of correctness' in that activity. This basically means what they should be doing and how they should be performing.
In these situations, we make a subconscious assessment of the gap between our current performance and the standard of correctness. We look at how big the gap is and how difficult we think it is to close it.
If we see the gap as being small or possible to overcome, it drives us to try even harder to achieve it. Like a tennis player losing a tight game to a rival of a similar ability level; they start training a bit harder to beat them next time.
On the other hand, if we perceive the gap as wide and difficult to achieve, it can have the opposite effect. Rather than motivating us, it causes us to experience doubt, anxiety, frustration, and more negative moods.
A great example can be found in a Duke University study on runners. Athletes were asked to cover 200 metres in 10 seconds—a seemingly impossible task. The average distance covered in 10 seconds was 59.6 metres. When the same runners were set a slightly less daunting task of 100 metres in 10 seconds, they performed better, averaging 63.1 metres in 10 seconds. Although the gap was challenging, it didn’t seem impossible so they pushed harder.
Now think about what this means for you as a trader.
Trading is a difficult skill to master, hence why over 90% of traders lose. So it’s inevitable that someone still in the process of learning is going to be dealing with losses, mistakes, and confusing situations. This will lead them to becoming more self-aware about their poor performance.
At that point, what are the standards of correctness that we typically compare ourselves to? It’s going to be the metrics everyone focuses on: P&L, success rate, drawdown, and number of trades. And you compare them to an elite-level; a consistently profitable trader.
This is made even worse by the lies you see on social media; your standards of correctness are inflated to unrealistic expectations. You compare your negative returns to people claiming to make triple-digit percentages. Your losing streak is compared to that guy on Instagram who never seems to have a losing trade. Your infrequent trades are compared to the trade history screenshot of the guy opening dozens of successful positions each day.
Suddenly, the gap between your current level and the standards of correctness seems extremely wide and difficult to overcome. As a result, you experience negative emotions and doubt your ability to succeed. You’re firmly on the road to giving up.
Changing Our Measures of Success
The neuroscientist Ethan Kross points out that our body reacts differently depending on whether we perceive something to be a challenge or a threat. Without realising, we do a mental assessment of the situation to determine this. We ask ourselves, “what is expected of me?” and “can I meet those expectations?”. A positive assessment leads to the situation being a challenge, whereas a negative one leads to it being a threat. When something is a challenge, we’re much better placed to have a good outcome. But most traders end up seeing the markets as a threat.
The combination of these factors kicks off a vicious negative spiral in many ways. One way is by stopping you from getting into a flow state.
Research has shown that being in a flow state when learning a skill can cut down the time it takes to reach a level of mastery by 50%. But we can only enter a flow state when an activity takes up all our attention and we become fully immersed in it. When that happens, we enjoy enhanced cognitive bandwidth to process information more deeply and efficiently.
However, negative feelings like anxiety and self-doubt divide our attention. This means the activity no longer has our undivided attention; we’re focused on a dual task. As a result, we’re not able to enter a flow state and our performance won’t be our very best.
So, what’s the solution to this?
Changing our standards of correctness.
Rather than comparing yourself to the end-game of being consistently profitable, use measures of success that relate to the level you’re at.
Instead of looking at your P&L, drawdown, or other overall performance metrics, focus on things related to your development at that time.
- How effectively are you assessing potential outcomes?
- How well are you choosing your position sizes?
- How often are your stop loss placements appropriate?
- How consistently have you followed your system?
These are just some examples. There could be many more depending on the method of trading you’re learning.
But the important thing here is that you’re not meant to be comparing yourself to perfection. Instead, compare your current performance to your past performance. For example, if you’re looking at how often you make mistakes, you don’t need to get it to zero mistakes, you just need to see progress - is the number of mistakes declining?
The measures of success you use should be linked to the milestone goals you have. Of course, overall you want to be making money from your trading in a dependable way, but there are a number of milestones you’ll need to reach along the way.
The Goalposts Are Always Moving
So we can see how by learning in an environment that isn’t catered to our ability levels, which is what trading forces us to do, there is a domino effect of issues that end up making the task even more challenging. But that’s not all, because the very nature of the markets themselves can cause even more frustration that amplifies these issues.
Imagine you’ve learned to play football and achieved a relatively high level. Then, suddenly, they move the goalposts, change the rules of the game every week, and even alter the type of pitch you’re playing on in the middle of a match. Adapting to such varied conditions constantly would quickly become extremely frustrating.
This is the experience traders face regularly. Volatility changes, fundamentals shift, and the structure of the market evolves. Strategies that were effective yesterday might require tweaks today. Suddenly, different factors become important while previously crucial ones fade in significance. The change can affect everything: stop loss sizes, position sizes, and entry criteria.
For beginner traders, this shift can be especially disheartening. They might find their footing under specific conditions, only to feel disoriented when those conditions change, leading to feelings of frustration and incompetence.
To truly succeed at trading, first-order competence isn't enough; traders need second-order competence. This involves developing the ability to learn new skills on-the-fly and adapting existing strategies to continually succeed, regardless of market changes.
Possessing second-order competence equips you to be resilient. One week, trading conditions might be straightforward, and the next, they could be disrupted by uncertainty due to global economic shifts. Those with second-order competence can pivot effortlessly, while those with only first-order competence might struggle. In essence, the former feels equipped to profit in any market, while the latter only feels confident in familiar situations.
But such adaptability doesn't happen spontaneously. It must be developed.
One of the ways to develop second-order competence is to learn to make adjustments in training. Rather than practising in the same markets, use a trading simulator to challenge yourself in different scenarios.
Here are some scenarios or approaches you may want to practice to improve your second-order competence:
Different Trading Styles:
- Trading extremely short-term, with trades lasting minutes or at most 1-2 hours.
- Intra-day trading, where you don't carry any trades overnight.
- Intra-week trading, holding trades longer than a day but not over weekends.
- Medium-term trading, with trades spanning more than a week.
- Predominantly relying on fundamental analysis, using technicals for pinpointing entry points.
- Adopting a set-and-forget system.
- Embracing aggressive risk and trade management with heavy scale-ins.
- Using conservative trade management, scaling out earlier.
Different Market Cycles and Events:
- The 2007-8 financial crisis.
- The 2010 flash crash and other similar events.
- The period when the Swiss National Bank unpegged the CHF from the EUR.
- The onset of the COVID-19 pandemic.
- The European Sovereign Debt Crisis.
- Cryptocurrency bull markets.
- Post-2008 financial crisis recovery.
- The first month of the 2022 Russia-Ukraine war.
- The periods preceding and following FOMC meetings anticipating or announcing QE (like summer 2012).
Different Market Types:
- Trading during various times: out-of-hours, in-session, session starts, session ends.
- Venturing into different asset classes and individual equities, both small and large cap.
- Trading cryptocurrencies over weekends.
- Exploring different time frames.
- Considering various time horizon price structures.
You can find my recommended simulator here (and use code DUOM10 for an extra 10% discount).
Tackling these diverse challenges not only prepares you for future shifts but also broadens your horizons, enabling you to find and trade opportunities that less versatile traders might miss.
What Stage Are You at Really?
The journey most traders go through reminds me of the typical Dunning-Kruger model.
If you’re relatively new to trading, think it all seems easy, and can’t figure out what all the fuss is about, it’s likely you’re near the peak of the unfortunately named ‘mount stupid’.
If you’ve been trading for a while and feel like it’s impossible, you’re likely somewhere near the ‘valley of despair’.
Either way, armed with the knowledge you’ve gained in this article, you can get a better perspective of your challenges and adjust your thinking to overcome them. In the end, if you continue focusing on your progress, you’ll eventually make it onto the slope of enlightenment and on your way to success.