Monday, April 5, 2010

The Kirk Report

The Kirk Report

Reading Less, Practicing More & Getting Experience

Posted: 05 Apr 2010 09:30 AM PDT

Lots Of Books

Q:  I am a relatively new trader with an voracious appetite for learning and getting better. I also work full-time so trading is very much a part-time endeavor.

For the past six months I have been spending approximately two hours per day (roughly 12 hours per week as I take off Sundays) toward my trading. In your opinion, how should I properly allocate my time between reading & learning (recommended books, links & reports you share, etc.) versus actual practicing (time spent on simulated trading) to gain the skills I require as quickly as possible? At the moment I'm dividing my time between both (1 hour practice & 1 hour learning) and while I'm making good progress as my results in my simulated trading are steady showing improvement, I would like to know your thoughts and whether you have any recommended "rules of thumb" to share.

A:  I have a number of thoughts to share about this topic and I'm really glad you asked. It is a topic I spend a tremendous time and energy covering within the mentorship group as I know this is of key importance.

First, I must start by congratulating you on a number of things including the fact that you devote as much time and effort as you do, that you understand the difference between learning and practicing to acquire trading skills, and that you're using simulated practice trading at this stage of your learning curve. I can't say enough about how very good this approach will be for you during your early-formative years. So, great job!

Second, it is my opinion that practicing is an crucial part of the learning. You can spend hours reading books and blogs but if you're not doing the things that require you to trade well and often through concentrated skill and practice, then you will not be spending your time effectively.

I find that most who read the website tend to spend far too much time reading more than they do practicing and real skill-development. In fact, I would say that you are unusual in this regard as you've decided upon adopting a split approach between both practice and study. Most of those who have joined the mentorship group tend to devote far too much time in reading and only a minor amount of time in concentrated and consistent practice.

However, since you are seeing steady and consistent improvement now, I would not recommend altering your approach one little bit. What you are doing seems to be working and that means you need to continue until that begins to change. Sooner or later there will be a time where your progress starts to slow down and you'll see a period when you think you are moving backwards again. It will be at that same point that you may consider bumping up the time you devote to practice more than study after identifying any issues that may be hurting your performance.

Ideally, through practice simulated trading you'll begin to figure out which areas you'll need to concentrate you study upon. This will help you concentrate your study time and allow for you to practice more and more. This will obviously require you to keep close and accurate trading records and stats not to mention in-depth study of prior practice trades to identify any issues that may be present in your strategy. Once you identify issues you think are present that's more than half the battle.

Bottom line - practice and study should not be mutually exclusive of one another but used very much the same way you are doing right now. For most, that means spending far more time in practice than study and reading than the other way around. Most of the problems relating to time management I see among members is that they spend far too much time reading and not enough time practicing.

Finally, I have two stories to share that can illustrate why I think practice is so important in the skill development process and why most would be benefited by reading less and practicing more and, importantly, while at some point you must move beyond simulated practicing.

First, I have a friend who also mentors other traders (mostly professionals who work at proprietary trading firms) and in a conversation this past year he shared a interesting story about an experiment he did at prop firm he worked. At the that firm, there were two identical twins of had similar skills, aptitude, experience and knowledge and who joined the firm but were not reaching their goals and had similar trading performance. When undertaking an in-depth assessment of how they allocated their time, my friend discovered that they were not using the time effectively and were spending far too much time reading the analysis and opinions of others including focusing too much on "trading the news."

As an experiment, he decided to isolate one of the twins and instructed him only to trade based on technical scans and screens while he left the other twin trader to continue to trade the same way as he had previously. The difference in terms of performance was incredible in the weeks and months that followed. While the trader on the news/opinion ban performed very poorly at first primarily due to the transition and loss of confidence (yes, traders often use news and opinions of others to seek comfort in their own positions and go crazy when they can't get their daily media fix), by the sixth week in the experiment that same twin was outperforming by a consistently significant margin. So much so that both twins now trade far differently and have seen far more consistent success.

While we live in a day and age where so much information is easily accessible and freely obtained, there is some evidence starting to show up that suggests that traders are no better off for being so vastly informed. In fact, being so informed can and often can work against you which is why concentrated and consistent practice more than reading/study is something I have grown to really believe in. While both are important and compliment each other during the early cycle of the learning curve, you will have to focus more time and energy on structured practice once the foundation of knowledge about trading and how the markets work are obtained. As you move beyond reading so much and practicing, there will be a time and place where study and practice must be set aside for actual, real-life trading. Along these same lines, I also have a story to share.

Back in 2008 my golf instructor (one of the top 100 instructors as rated by Golf Magazine) told me that I spent far too much time practicing on the golf range and not enough time actually playing golf. I remember him saying to me like it was yesterday that "If you played as much as you spent time practicing your score would improve." Back then on an average week I was split between the two just like you are now (4 hours on the golf range & 4 hours on the golf course.) So after he said that, I stopped going to the range as often and instead played much more. What happened was that I learned how to score and my confidence improved dramatically. By putting myself in pressure situations on the golf course more than I had in the past, I simply learned to focus and play much better especially in tournaments when I desired to perform at my very best.

True real life experience is a teacher unlike any other.

I share this personal story to make the point that there will be a time and place where study and practice must be set aside for actual, real-life experience. In fact, some of you are already at this key stage where you should not be spending more than 30 minutes every day reading & studying versus learning through real-life trades not just simulated trading. In this game, nothing can serve as a long-term substitute for the number of trades you can work to build experience. In essence, no book, blog, or any other resource (no matter how helpful they may be) can serve as a long-term substitute for the level of experience you truly need that can only be acquired by real-life trading where heavy emotions and real money are on the line.

By having a solid understanding of what skills you lack and then refocus your time and energy on those through concentrated practice followed by real-life trading will go a long way to develop the experience you need to achieve great things in the market.