Making Progress

​Learning to master the markets can sometimes seem like climbing a tall mountain: You know it can be done, but you don't know how to do it, or whether you could do it if you had to. The task may seem insurmountable, and as you think about it, daunting. Fully mastering the markets takes time; time is needed to gain the vast experience required to trade in a variety of market conditions, and the advanced skill set required takes a great deal of practice. Rather than tackle the experience all at once, however, it is more useful to pick a few key trading strategies, identify the market conditions where they perform optimally and trade under these ideal conditions to build up trading skills and confidence. Rather than strive for instant success, it's better to make sure and steady progress.

There are benefits in taking it slow when it comes to learning how to trade. It's essential that a novice trader build up a sense of confidence with a few key strategies. Psychologists refer to this process as building up self-efficacy beliefs. Self-efficacy is different from self-esteem. A person can have low self-esteem yet believe that he or she can perform a specific task under a specific set of circumstances with a feeling of self-efficacy. Similarly, a beginning trader may believe that he or she is an average trader but has specific abilities when trading a particular trading strategy under specific market conditions. For example, suppose you know you can trade in a bull market using just a few key signals. It may be useful to trade this strategy at the start of the trading day. There's a good chance that you'll achieve success and feel good about your initial abilities. In other words, you'll feel a sense of self-efficacy. Now, you may also know that should market conditions change, you are better off standing aside.

Research on self-efficacy has shown that when people believe they have self-efficacy regarding a specific set of skills, they set challenging goals, show unfailing persistence, experience pleasant moods, and can easily handle stress. These characteristics are conducive to profitable trading. Anything you can do to increase self-efficacy will help you master the markets and achieve long term profitability. The two most obvious ways to increase self-efficacy are to start off trading with methods you have mastered so that you meet with initial success and increase your feelings of efficacy, and to practice and gain experience as a trader. The more success you achieve, the greater your self-efficacy, and the more likely you'll be able to trade in a greater variety of market conditions and persist until you achieve consistent profitability. So don't be overly ambitious. Set realistic goals, achieve initial success, and build up your sense of self-efficacy. The greater your self-efficacy, the better you will succeed in the markets.

Let me give you an example. Pete was only a breakeven trader after 22 years trying to make a living trading in the markets. He never seemed to be able to make that important breakthrough that would enable him to trade for a living. That's when he came up with a simple trading idea that enabled him to achieve success.

Pete liked to trade options, but the many different option strategies did nothing more than complicate his trading. From trading complicated option positions in the futures markets, Pete switched to trading stock options. Changing markets was a good way to get a fresh start.

Pete then did a very simple thing. He decided to sell covered calls only on stocks that were rising. Bingo! He began making money. Selling covered calls exactly fit his efficacy profile. There's virtually always something that is going up, even in bear markets. Although the choices are fewer in a bear market, the excessive price of all options—calls and puts rise due to a rise in volatility. After all those years of trying, Pete found his way to trade. He is now a full-time professional trader.