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In order to answer this, one needs to understand where he is at current point. If you need to keep trading for a time period N, then you need to understand the required skills and talents which would keep your trading account alive .
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Emotional Quotient
What is emotional Quotient?
Imagine, you found a mosquito sitting on your forearm. Expectedly you would react to it, by killing it with a slap. Once the mosquito dies, how will you feel , determines your emotional quotient. Most likely you would be glad that you negated a threat. No remorse.Thus emotional quotient at time zero stands at 100 % in this scenario.
After a while, let's imagine, You found your beloved pet (dog or cat) laying dead. How would you feel determines your emotional quotient again. Most likely our Mood becomes dull, tears start to flow, mourning sensation sets in. This state of mind gives you a very weak emotional quotient. In the chart you could see that parabolic fall in emotional quotient.
The graph represents a newbies physiological approach towards markets. Then compares it with emotional state of a expert trader who has seen almost all possible worse case scenarios in market. Its this HIGH EQ of a newbie trader which results in “beginners luck” factor.
Benefits of being a newbie trader:-
There are very few parameters that hinder your decision making thought process.
Market sell-off, or panic movements are yet to be experienced.
Averaging out positions end up in giving profits eventually.
A ignorant newbie holds positions in profit longer even over the weekends.
Risk is the least parameter, it’s always about targets due to high confidence.
There are four stages that a trader passes through.
1) You don't know; What you don't know.
2)You know ; What you don't know.
3)You know ; That you don't know.
4)You know it; you mastered it.
1)You don't know ; what you don't know
Here we will take an example to illustrate this . You are a new trader/ car driver. On a rainy night, when roads were clear you made a 100 mile journey in just 20 minutes with a top speed of 150 mph ( just imagine please. don't calculate).
This is the stage where you don't know , What all risk that where there . But the time was good and you made it for that one particular drive.
2)You know ; What you don't know
Next morning in newspaper you read an article about a car crash. This crash occurred in the same route that you did the driving last night. Infact this car crashed say 15 minutes after you passed that point. It skidded off the road and fell off the bridge.
Yea..! Now you know, what you don't know. Next time you will never hit 150 mph , or drive within twenty minutes. Likewise in trading you won't take a huge bet after watching an unexpected event screw a trade.
3)You know ; That you don't know
You started discussing about this to everyone. Every guy pitched in his experience of rash driving. You came to know about mud on road issue, sharp turns, AN animal could stand in middle of road etc. Now you are very well aware of risk involved in reaching 150 mphs .
Trading news affects you. What obama said, how fed reacted all those tiny things remind you all potential reversals in market or risks. At this stage you are more focused in knowing more about risk and , what all things that could go wrong.
4)You know it; you mastered it.
From being a novice first time driver, now you are an experienced driver with 10 years of experience. Hell there is no way you will take that stupid "risk" of driving so fast ever again.
Likewise the encouraging news, the optimism that you had at beginning has been overshadowed by risk and fear of loss. You have mastered every risk scenario so well that, you won't sit in profit for long. Every slight correction will bring your heart to mouth and shake your confirm believe of holding the position till target meets. Every potential trade will be followed by analysis paralysis. Too much risk analysis and too little patience.
Oh well, only difference between driving and trading is.....
" In driving with years of experience , probability of crashing your car will reduce. In trading, you crash your account balance eventually and repeatedly !! "
Requirements for a newbie to become a full time trader from emotional quotient parameter:-
One should be able to remain rational without getting attached upon the market moves.
Every averaging in a leveraged market increases risk potential exponentially. This causes one good swing in opposite direction draw you back by months. How will you handle it emotionally.
Can you stop your brain at will from, thinking about markets and get detached from it ?
Too much focusing on price movements causes stress. At times raises blood pressure if your ProfitNLoss shows a huge loss. How good are you in handling it -------------------------------------------
Intelligence Quotient
Imagine a kid who is in kindergarten, and we calculate his intelligence quotient (IQ) in mathematics terms. Since the kid has no knowledge about maths yet,we assume his/her IQ to be zero.
With passage of time, this kid learns it. By some degree level we assume his IQ has gone up exponentially in mathematics. This is how traders intelligence quotient works.
Newbie traders intelligence quotient is near to nil. There is no knowledge about arbitrage, hedging, option pricing , premium collection, call & put, binary options, expiry of futures, lot size ,margin calculation, transaction costs,service tax etc. All these words sounds alien to them. They have zero IQ in that respect.
The above graph represents how with time , trader gains more insights and acquires intelligence quotient.
More the time spent, more experienced that trader would get. After monitoring financial markets day and night over a long course of time, Every trade opportunity is hindered with potential risk involved.While a newbie trader is too much concerned with potential opportunities,with intelligence quotient a traders focus shifts towards risk aversive measures.Too much intelligence quotient causes too much analysis and this in turn leads to analysis paralysis syndrome. Here a trader keeps on analysing market more than ever needed.
Expert trader who wants to make a living out of trading, has to learn the art of giving weightage to each parameter that should be considered before taking a market risk. At any given situation , out of 100 possible risk their would be just 2-3 major threats. One needs to be an expert in pin pointing those and do a leap of faith trade. At times, fed news is important, may be unemployment data, or may be too much profit booking etc.. choose your parameter wisely Too much intelligence is bad. Keep this a medium term.
Professional Trader
As shown in above chart a professional trader who makes a living out of trading must find a niche balance between EQ and IQ. Usually it's take 4-5 years with 3-4 times bankruptcy situation, before a person finds this niche balance between his emotional quotient and intelligence quotient.
Characteristics of a professional trader:-
He realizing that his brain is always impatient to book profits and wait when in loss. thus he needs to control his mind by bringing in some IQ into the game.
Almost every trader leverages without calculating risk. this eventually becomes an habit until one fine day market goes irrational for longer period than you can remain solvent.
Professional traders manage to cut losses on time with no remorse.
Confident pro traders add on more positions into their already profit making position, while other traders would be thinking of booking profits. This is due to high EQ at that particular trade.
There profit charts look parabolic with exponential growth while loss graph will be linear declining. Thus they need just few winners with exponential profits when compared to lots of linear losses.
Conclusion
Thus i hope i have included almost all points needed to be thought about before plunging into trading for a living. A person who desires high emotional quotient all the time usually becomes a sage. While, a person who has high Intelligence quotient ends up in NASA. The person who has that right balance needs 5 years of loss making experience first to be a good trader.
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