Wednesday, July 21, 2010

The Animal Kingdom of Traders : Where are you in the Food Chain ?

Last week while I was playing with a little hamster it came to my mind that there are several different levels of experience and development in forex trading that are much alike the positions of animals within the food chain. I gave this a little bit more thought and I came up with a small classification system that uses several animal figures to point out the main characteristics of the different phases a person goes through when starting a long term journey in forex trading. I realized that each different stage has its strengths and weaknesses and that evolving towards the next one is merely a matter of overcoming the problems that arise due to the nature of each particular phase. On today's post I want to share with you my "animal kingdom" classification system in which I attempted to give a "scale" of evolution within forex trading. Where are you on this "animal kingdom"? Keep reading to find out !

I have never seen any "trader evolution" classification system that shows you what traders generally go through and what the general process looks like, for this reason I believe my "animal kingdom" system has value as it will allow you to see where you are within the "food chain" and it may also give you hints on what you should do to evolve towards the next level. It is also worth mentioning that I considered both traders far less and far more experienced than me in building this scheme and even though I consider I have advanced significantly, I still have a lot of way to go to reach the top. I will now tell you how I classified the different stages of trader development and what makes up each one.

Level 1, the rabbit. I thought I would start my classification level with rabbits since they are near the bottom of the real food chain. People who are in the rabbit stage of trading have just heard of trading or they have very limited trading experience. If you have never had a live account, you don't understand how to calculate risk and you don't know what a contract size is you are probably in the "rabbit stage" of trader development.
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Level 2, the hamster. These furry and cute little animals are extremely curious and eager to explore although this sometimes may put them in harms way. People within the hamster stage of trader development have little knowledge and they believe very unsound profit targets (like a sustained 100% average yearly return or higher) are possible with very low risk. Hamsters already have their first live account but they don't have any trading system or methodology, they are playing the field and looking for a system or strategy to use.
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Level 3, the guinea pig. If you have had a live account for a few weeks and you have traded demo for quite a bit you are probably within the guinea pig phase. I called it this way because traders in this stage get into strategies that are absolutely unsound and bound to wipe their accounts. Guinea pig traders start to get scalpers, martingales, grid systems, etc in the search for a system that achieves the unrealistic returns they hope for. Traders within this phase generally end up wiping accounts or they switch continuously from system to system hoping that "the right one" will eventually come.
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Level 4, the ferret. If a trader survives the above stage in which unsound trading strategies are the norm, he or she may realize that the real profit lies around the application of sound trading principles with strong money management over the long term. Even though a trader within the ferret phase may still not be profitable, the inherent realization that there is now a path to follow makes this stage very important. If you have started a live account to trade a strategy with sound trading principles with a long term trade perspective then you probably belong here. (if you still think those "wild 10000%" profits are possible then you are still on level 3) :o).
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Level 5, the dog. Traders who have done a year of live trading who have got some profitable results with controlled risks and sound trading tactics have now started their journey into profitable territory, they are now predators in the food chain. A trader in the dog phase now understands that draw downs are a part of profitable trading but there still may have some issues dealing with the psychological aspects of trading.
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Level 6, the lion. If a trader has been able to achieve more than a year of profitable trading with any system and also more than a year of profitable trading with a system of his or her own personal design then he or she enters the lion stage. Within this period not only does the trader know what realistic profit and draw down targets are but he or she knows enough about how the market works and the exploitation of inefficiencies to make up his or her own systems based on this knowledge.
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Level 6, the tiger. After three years of profitable live trading tiger traders now have a very good grasp about the market and how to systematically exploit inefficiencies in the long term. Tiger traders no longer concern themselves with unrealistic expectations of any sort but they now have long term risk and profit projection based on their own trading. Traders within the tiger phase have a domain over draw down periods and they can trade with almost no emotional ties. Getting to be a tiger is extremely difficult and a position reserved only for the very small percentage that can actually get through the first 4 levels.
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Level 7, the elephant. After ten years of profitable trading an elephant trader is now what could be considered a full mentor or "guru" in the field of trading. Traders who have reached this point have a very good grasp of market action, they can effectively build and design trading systems and they have trading systems that have been in place for years achieving profits through the systematical exploitation of inefficiencies. Elephant traders have seen the good and the bad times and it is very likely that they will be able to trade their systems through a large variety of circumstances.

Of course, my classification system is not absolutely dogmatic and I just considered it a fun exercise to better gauge where we are relative to the progress scale in forex trading and what things we may want to do to evolve towards the most desirable "elephant position". Evidently you may agree or disagree with the classification given but this are in general the stages I consider people go through when dealing with trading. Sadly few people will ever become "ferrets" and even fewer will ever be "elephants", however if you are a "rabbit", "hamster" or "guinea pig" you can always work, learn and do the effort to move up in the food chain and stop being the meal for the "higher predators" in the forex market :o).
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Where do you think you are in the above scale ? are you already a predator ? do you think another level should be added ? Feel free to leave a comment to discuss my "animal kingdom" classification system :o) If you would like to learn more about my journey in trading and how you can get a true education about the development of likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

4 comments:

Maxim said...

Hello Daniel,

It's a really interesting approach to classification! But, there is a small problem with it: in nature, the elephants are being hunted and eaten by tigers, therefore, your classification should take into account this fact...

Maxim

Rodolfo Maria said...

Hi Daniel,

you missed the cat. This clever animal can be inserted int chain one level higher than the dog, for his opportunistic life style, patience and intelligence. If a cat could operate on forex, maybe it should become reach, at leat I believe.

Best,
Rodolfo

Daniel said...

Hello Guys,

Thank you very much for your comments :o)

@Maxim : Well, as a matter of fact Tiger traders do hunt for Elephant traders and eventually they do take their place so you could say that it is not that wrong. Of course, it is just a funny exercise :o) What animal do you think you are ?

@Rodolfo : Well, I thought I would make tigers and lions to represent felines but there could certainly be a place for a cat. I think that if a cat traded forex it would probably be too greedy and it would lose. Cats seem to be anything but humble and they probably represent certain traders out there. What animal do you think best describes you in the classification Rodolfo ? :o)

Anyway, thank you very much for the comments guys :o) I hope you enjoyed the post !

Best Regards,

Daniel

Gabor said...

Hi Daniel,

Like every simile this one also has its weakness and strength, but altogether I liked your category system.
As for me I think I'm somewhere between the ferret and the dog - I tend to see myself closer to the dog :). My midterm target is to be a lion, that is to develop my first long term profitable system. This is going to be a tough jump.

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