Friday, February 01, 2008

From Trader Education to Trader Training: A Trading Curriculum

In my recent post, I noted three research conclusions about expertise that suggested that elite levels of performance typically require ongoing, structured training. We see this among Olympic athletes, physicians, soldiers, chess players, and musicians. Nonetheless, offerings in trader education typically consist of one-off seminars, books, magazine articles, or Web posts. Missing is the notion of curriculum: a planned process for bringing beginners to competence and competent traders to expertise.

Let's take a look at a medical school curriculum to explore what a true program for trader training might look like. The education of a medical student typically progresses through several phases:

1) Developing a Fund of Information - The beginning medical student is immersed in anatomy, physiology, biochemistry, and the like. The idea behind this is that it is not enough to know which treatments go with which illnesses: you need to understand why this is so. The fund of information helps physicians reason their way through illnesses they may not have seen before or that may have an unusual presentation. Similarly, a trader's education should not begin with indications of when to buy or sell. It should be grounded in an understanding of markets and how markets work. This means understanding the participants in the markets, from the market makers and other liquidity providers--and their activity around the bid and offer--to the hedge funds, mutual funds, investment banks, and sovereign wealth funds that exploit longer-term trends and intermarket relationships. What is program trading? What is arbitrage? How can you identify markets dominated by market makers vs. longer-term institutional participants? How do markets overseas affect our market and vice versa? How do currency and fixed income markets affect stocks; how do they affect each other; and how are all related to economic activity here and abroad? A physician *can* treat a person without understanding the intricacies of the human body, and a trader *can* trade in ignorance of supply/demand and global markets. In ambiguous situations, however, it's the well-versed doctor or trader who can best make sense of situations and act constructively.

2) Observational Learning - The next phase of education for a medical student is observational. They watch resident physicians and experienced attending physicians perform histories and physicals; they observe in the hospital by walking with doctors on rounds and learning from specific patient cases. They may assist with treatment in small ways, but their major role is to learn through immersion. Similarly, the trader who is training can benefit from watching experienced traders at their craft. You can learn from their mistakes and their strengths, and you especially learn by observing different traders doing different things. Online trading rooms, where a mentor will follow markets with attendees, are very helpful for such observational learning. Very often, the inspiration of someone you watch provides the first role model that helps you decide how you are going to tackle your profession. In medicine, much of this observation occurs during multi-week "rotations" through various medical services: internal medicine, surgery, family medicine, pediatrics, psychiatry, and the like. A trader who observes multiple markets and trading styles is most apt to figure out his or her own niche.

3) Supervised Practice - Much of the third year of medical school is observational, with increasing (though limited) participation in the treatment process over the course of the year. By the fourth year, medical students take responsibility for specific patients under the close supervision of junior and senior residents, as well as attending physicians. Observational learning continues, but the senior (fourth-year) student now also has responsibility for helping teach the beginning observational learners from the third year. During acting internships (AIs), fourth year students take on even greater responsibility, testing out what it is like to be a beginning level resident physician. Over the course of the fourth year, the decision of a medical specialty crystallizes, as the student has received feedback--from instructors and experience--regarding strengths and weaknesses. Similarly, among traders structured practice in different markets provides the feedback and experience to identify a trading niche. As I emphasized in my book, the use of trading simulators (mock trading with real market data) is particularly helpful in this regard. Simulation platforms such as Ninja Trader also enable practicing traders to gather data on their winning and losing trades, so that they can immediately see what they're doing right and wrong. This deliberate practice is a hallmark of all expertise development. Here is where an experienced, knowledgeable coach/mentor can be particularly helpful: as one who can help make sense out of the performance data, make suggestions for improvement, and help the developing trader set goals that sustain the learning curve.

4) Consultative Practice - Once the student finishes four years of medical school, he or she has an M.D. degree, but cannot practice medicine. The residency, which typically lasts three or more years, is a period of specialization and intensive learning by doing. Resident physicians take primary responsibility for their own patients, but operate with a high degree of consultation with more senior residents and with attending physicians. Whereas the first four years provided a fund of information and a knowledge of general medical practice, the residency period moves students forward in expertise development in their chosen specialty. This is where they learn the information and skills specific to fields such as surgery or psychiatry. Residents often teach medical students, but also participate in case conferences, seminars, and "grand rounds" sessions themselves to further their education. A great deal of learning is at the bedside, seeing as many different kinds of cases and participating in as many different procedures as possible. For the trader, this is where participation in a virtual trading group (an online association of serious traders) or in an actual proprietary trading group (or other trading setting) can be valuable. It is also where the education provided by investment banks is most valuable, as new traders learn from their senior counterparts at a desk and gradually take on increased levels of responsibility. Simulated trading may still be helpful, but at this consultative phase of learning, it's important to put on real positions using the real strategies that have been observed and tried out in practice. The consultative part is crucial: having mechanisms for obtaining feedback about trading processes and results. Software packages that provide comprehensive trader metrics, such as Trader DNA, are very helpful in this regard and coaching/mentoring can be quite useful--particularly when the coach is experienced in the specific kind of trading you're undertaking. Many traders develop personal and professional relationships with peer traders online that serve the important consultative function. The important thing at this phase is to trade as many different market conditions and strategies as possible to hone skills and identify strengths.

Only after four years of medical school and many years of residency (and sometimes sub-specialty training as well), is the physician considered to be sufficiently expert for board certification in a specialty and independent practice. This is a recognition that expertise develops over many years of dedicated effort. Similarly, I would not want a trader to be managing my money until he or she had a similar level of experience and a track record of growing success to document expertise.

I have drawn the parallels between medical training and the training of traders to illustrate how far the trading field is from any kind of professionalization. Only in such a vacuum is it possible for huckster "gurus" to offer their promises of quick riches at seminars, backed by the support of vendors who don't care whether their products and services are utilized responsibly or not. We are not yet at the point where enlightened trading organizations (the big leagues) develop farm team organizations or comprehensive training programs for cultivating talent. Instead, we let traders go at it themselves and accept that 1 in a thousand will survive the Darwinian selection process. I offer this post as a vision for a different way to approach trading and the development of traders. It will take visionary and out-of-the-box thinking to make such training economically viable as well as practically effective.


Devotion to Development

Web 2.0 and Transparent Expertise


Brandon Wilhite said...

What you are describing would indeed be very different. I wonder how many people would never get involved in trading at all if they realized that the learning curve was so potentially long (and steep).


Ziad said...

I agree that this trader development proposal is truly visionary and would work to instill some real professionalization in the trading industry. However, there is something about trader development that has been on my mind for quite some time now that poses some challenges to parts of this proposal.

In short, right now there is no such developmental structure in the industry, and yet there ARE and have always been many world-class experts. The argument though is that they are only 1 in 1000 because the structure isn't there to ensure more than this small number truly thrive. However, is this number really any different than all the other performance fields? If you look at sports, far less than 1 in 1000 ever become world class performers, despite all of the structure and professionalism in development in those areas. Even in medicine, while most students that undergo the rigorous multi-year training end up quite competent, isn't it probably safe to say that probably only 1 in 1000 doctors is truly a world-class expert performer?

So I think that what truly makes these world-class experts is something above and beyond all of the developmental structure. Indeed all doctors get very similar training and development and yet only a small number can be considered world-class like I just mentioned. I think this goes back to what you stated in your book that the essential thing is having the desire for that motivational high and the subsequent extraordinary immersion that results to reach it. And this immersion due to finding one's true "calling" is probably what spurs the special learning. And so it is with traders. Assuming we were to see such structure in trader development, I don't think we'd see a higher number of WORLD-CLASS performers. We would probably see greater competency and lower failure rates for sure, but I think the end result would be an overall more competent trader population but with still a similar number of world-class experts as a select few would separate themselves from the now more competent pack to reach ever higher levels of expertise.

Following this line of thinking, the only difference I think there is in all of the structured and professionalized performance fields and trading is that perhaps those fields are far more evolved in their participants. This greater evolution however does not imply more world-class talent, because by definition the talent bar is much higher and only a few will reach that level.

So as my personal conclusion, I would have to say that while such an evolution in trader development would raise overall competency, it would not really raise the number of traders that consistently make millions, which is all the 1 in 1000 statistic really refers to. And while a lot more traders will be competent (i.e. able to at least break even) we must remember that this is a unique zero sum game. No matter how you slice it and dice it, for there to be traders consistently making money, there must be traders consistently losing money; and as the entire population improves, it will simply mean more equal division of the pie, and not more brilliant performers running around.

SSK said...

Thanks for your insightful counsel Brett! I have implemented many of your excellent suggestions to my succsess, as limited and early in the journey it is. I created something I call TAMTA'S Trading analyzer. It allows me to do the things you speak about. I tie it into my Daytradingsnippets production. It is a powerful tool for selfreflection, comparing strategys, etc etc. Thank you so much for your endless counsel. Here is the link within the site to the analyzer. There is an instructional video and an update link that tracks the snippets trades. Thank you agian for all you do. Steve ~SSK~

nicker said...



Charles said...

I wonder how the dynamics of the markets would change if the majority of traders reached the "Competent" level of trading.

I also wonder if it is possible to have a far reaching mentorship program amoung traders, when many traders believe that profitability is the result of taking advantage of less informed traders.

Both Dalton and Steidlmaayer/Koy have stated that being "Proficient" or "Expert" reqires a combination of Market Understanding, Strategy and Self-Understanding. Most of us spend most of our time struggling with Market Understanding and Strategy. But, I suspect very few of us are willing to spend much time with Self-Understanding. As Ziad has stated, even with a professionally structured training program, only 1 in a 1000 would reach the "Proficinet" level.

Quite simply, most of the trading universe would refuse to undergo a structured program of Self-Understanding, which would be required to reach the "Proficient" level of trading.


John Forman said...

Charles - ziad actually said 1 in 1000 would be "world class" traders, not merely "proficient". In terms of your question about what would happen if everyone were to become competent, then the implication would be of a much more efficient market environment - one in which above average profits would become much harder to achieve.

ziad - While I agree with the bulk of what you've said, I would make one big point which contradicts some of your argument in the last paragraph. Not all markets are zero-sum. I actually posted something on that subject on my own blog a while back:
The Zero Sum Game

Adam said...

Brett ~

Your use of medical training as an analogy for building robust expertise seems particularly apt. In finance there are programs leading to broad-based knowledge, such as the Chartered Financial Analyst designation. These, though they do address market mechanics, do not include trading as part of the curriculum.

Brandon, above, makes an excellent point when saying, “… how many people would never get involved in trading at all if they realized that the learning curve was so potentially long (and steep).” Many people are drawn to the craft’s superficial luster. It must be admitted this was part of the initial appeal for me.

The first year of blundering led me to dive into “Market Understanding” and “Strategy.” It was during my second year trading that I realized markets are mirrors returning to us what we put in, and the need for “Self-Understanding” became apparent.

As Charles, above, rightly points out, “… very few of us are willing to spend much time with Self-Understanding.” You would probably agree that this is the longest, steepest part of the learning curve. It’s a nearly merciless focus on this to which I attribute any success I have had.

I think many of us are interested to learn how this last, key aspect would be built into your trading curriculum.

Wonderful posts. Thank you for sharing your ideas with us.


Ziad said...


Thanks for your excellent comment. I'm a futures trader so I tend to think in terms of that market. But you're absolutely right, the stock market does not have the zero sum characteristic. However even given that, I don't think my argument changes much. Whether stocks on the whole are appreciating or depreciating, the more competent the trader population the more equally profits will be dispersed among the non buy-and-hold crowd. In fact, I think you put it perfectly by saying that markets would become more efficient and above average profits harder to come by.

Given all of this, it makes me (somewhat selfishly perhaps) question the benefit of professionalizing the industry. As a trader, I am GRATEFUL that there is inneficiency, and the more of it there is to exploit the happier I am. So maybe it is worth questioning... What would we be truly trying to do by professionalizing the industry? If we're not creating relatively more world class talent as we initially intended, could we be simply "socializing" the system by changing it from one in which the majority of the profits and wealth are in the hands of the few to one in which greater equality reigns supreme? And would that be the intended outcome? It seems somewhat absurd for me to be questioning such a noble undertaking as ensuring greater competence among the majority of traders, but in an industry where those traders are technically my competitors, it is human nature to wonder.

Adam said...

Ziad & John ~

Your combined posts sum to an interesting insight with which I fully agree.

In theory, more equal distribution of both skills and information would tend to increase market efficiency. Under such a regime returns would regress toward the market mean, making individual security selection less likely to return a risk premium. This remains, however, just a theory.

Has more equal distribution of market information changed the relative percentage of winning and losing traders from any previous regime of information distribution? I don't know.

The famous (infamous?) Turtle experiment demonstrated ~ despite some claims to the contrary ~ that traders cannot be bred like amphibians. They might thrive under the careful nurturing of a skilled breeder, but once released into the wild, one or less out of a dozen survives.

Given the wide variance of human nature, no matter the curriculum offered, I think it's reasonable to expect that the percentage of people who could reap long-term benefit from it would remain vanishingly small.


hrgreen said...

Here is a summary of my trading training to date..
Thanks Brett

Brett Steenbarger, Ph.D. said...

Thanks, all, for the excellent comments that really illuminated the post. Very good points about the learning curve for self-understanding, as well as the curves for learning markets.


sirla said...

This was an excellent post. I worked at Morgan Stanley in 2006 and 2007, and the training you've described is dramatically different than what is offered at the investment banks. While an archive of trading knowledge is available (online courses in market fundamentals, access to books, etc.), and if you're lucky enough to land in a group that believes in properly training new traders you can get hands on guidance and feedback (but that's rare), training at the firm is by dropping a new trader in and seeing how he/she does.

I think good training is a matter of cost. To a hospital, from a cost perspective, it's essential that new doctors are properly trained (to avoid lawsuits, ensure return patients, etc.). At an investment bank, if 1 in 1000 traders will have what it takes to be successful, wasting resources training 1000 when you could instead discover the 1 using a sink or swim approach makes more sense. Also, those experienced traders qualified to mentor new traders are better utilized making money for the firm, rather than training 999 probable loss generating new traders and the 1 winner.

Here's hoping for a change!