Although learning to trade can be fun for many people, it can also feel frustrating as hell. Why is that?
With most other complex skills, your development involves performing in environments that match your ability level. You start off being surrounded by beginners, then as you develop a bit further you might be up against an intermediate level and eventually you’ll be there with the other experts. To demonstrate, take a look at these different activities.
Here we can see people playing at chess tournaments.
Here are some people winning awards for science.
Here are teams of people playing in football finals.
What do we see in each of these cases? You have people going up against people that are at their level. The kids compete against the kids, the professional adults compete against fellow professionals. You don’t have everyone competing at the same level.
Now let’s take a look at the equivalent for traders.
With trading, you’re always at the deep end. There isn’t an easy mode or a hard mode that we can switch between, it’s just the markets and they are always the same for everyone.
What do you think would happen if you had five year olds just starting to learn to play football, having to compete against people like Lionel Messi? The five year olds would get frustrated with not being good enough to even get a touch of the ball and they’d give up. The same is true with trading.
Think about it, what can you do to make the situation more manageable when you’re learning?
Of course, we can do things like using a demo account. However, all that’s doing is removing the monetary risk and reducing the psychological factors. The difficulty of the skill itself is still the same, since it’s still based on the real markets.
You can also use a simulator or manual backtesting. That gives you the advantage of being able to slow down or speed things up, and replay moments to experience them again. But it’s still based on the real markets and the situations are the same that all ability levels will deal with.
We know that 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 a lot of losses, a lot of mistakes and a lot of situations that leave them confused.
Why Competence-Based Motivation Is So Important
A famous piece of research investigating how expertise is developed found that competence-based motivation is important for on-going learning. In other words, in order to keep driving towards achieving more competence and eventually mastery, people need to feel a sense of competence along the way. They need to feel a sense of achievement.
If you’re a beginner tennis player and not very good, since you’ll be playing against other beginners you might not actually be aware of how bad you are compared to an expert. For traders, it will always be apparent because you can easily compare your stats such as your return, drawdown and trade success rate; these will all show you the level you’re at.
Duval and Wicklund’s research on self-awareness found that when people are made more self-aware they compare themselves to the standards of correctness in that activity. Depending on how big the difference is between their actual standard and the standard they need to be at, and how difficult they perceive it to be to get there, they will either try harder or it will lead them to experiencing more negative feelings such as doubt, anxiety and frustration.
If you're being self-aware as a beginner and you know you’re not as good as other beginners, it might lead you to work harder to reach that level. But if you’re in a situation where you are being compared to an expert, you’re likely to feel negative about the situation. This is the situation learners are facing in the markets.
Achieving Flow State
Many traders may not consider themselves a beginner anymore after a year or two and may consider themselves to be at an intermediate level. That’s only going to make matters worse, because now thoughts creep in such as, “trading profitably is impossible, I’ve been working at this for months now and I’m still not making money yet”. These sorts of thoughts make the process even more challenging.
Rather than feeling the sense of competence that we need to succeed, these sorts of thoughts lead to more frustration, doubt, anxiety and depression. These become a distraction that divides our attention and drains our neural resources.
Unfortunately, this makes it impossible to enter a flow state. When we experience flow, we are totally in the zone; our attention is intensified and we are completely immersed in the activity we’re doing. This not only improves our performance, but it’s also a state of enhanced learning since we have enhanced cognitive bandwidth to process information more deeply and efficiently.
Since a flow state requires intense attention, it won’t happen if our attention is divided. If we are frustrated or anxious, we won’t experience flow. We have to be feeling a sense of competence, because flow comes when we encounter a challenge but feel we are able to overcome it.
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.
The markets are inherently frustrating
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, and then suddenly they literally move the goalposts, change the rules of the game every week and alter the type of pitch you’re playing on in the middle of a match. If you had to keep adapting to completely different ways of playing constantly, it would get very frustrating, very quickly.
This is what we experience with trading all the time. The volatility changes, the fundamentals shift, the structure of the market moves. What worked one way yesterday might be slightly different today. You may have to consider different factors and ignore ones that were important before. Different stop loss sizes, position sizes, entry criteria and more.
This can be really frustrating for beginner traders who begin to succeed under particular conditions but aren’t prepared for anything changing. They feel frustrated and incompetent in the new scenarios which stops them from progressing further.
What’s the Solution?
- Internalise what you’ve just heard.
With these sort of mental hurdles we have to overcome, just knowing they exist can help you to persevere. I think more than most skills, traders really encounter the Dunning Kruger effect.
If you’re brand new to trading and things are going a bit too well, it’s likely that you’re towards the left side of the chart and have yet to experience the dip. This is something you should keep in mind and avoid getting overconfident.
If you’ve been learning for a while but are still not profitable and are feeling the struggle, you’re likely to be further along in your progress than you think. Your confidence is likely to be lower than what your ability level warrants. By reflecting on this, you may limit the effects that a lack of confidence and competence can have on your mood.
- Have an appropriate learning plan
The right learning plan will be one that moves you along one step at a time to maintain a feeling of competence. The returns you make in the market should not be the focus as you want to avoid being measured against a standard that’s beyond the level you’re at.
Lots of people think trading is something you learn by doing, but that doesn’t apply to any other complex skills, so why would it apply here? All you’re going to do is spend time approaching the markets as an amateur; failing and growing in frustration.
Instead, have a plan that takes you from deeply acquiring the knowledge and moving on to deliberate practice for the skills involved. Only once you’re able to perform the necessary skills to a high level should you move onto live market trading with a demo account and finally to a live account only once your performance and results are consistent.