A common way of looking at the development of any skill, including trading, is to use the psychologist Abraham Maslow’s Four Stages of Learning model. Maslow uses the matrix of unconscious/conscious and competence/incompetence for his model. The first stage is unconscious incompetence where the individual is unaware of what they don’t know and unaware of what they need to know; and the final stage is unconscious competence, sometimes referred to as be being ‘in the zone’, where one just ‘knows’ what to do without needing to think about it.  Psychologist Abraham Maslow developed this model over 50 years ago. It’s a very robust developmental model and it lends itself well to describing the process of developing almost any skill.

As a psychologist working with traders I found that Maslow’s developmental model is an excellent description of the developmental stages a trader goes through, but not necessarily the best model to use when actually talking to a struggling trader. For that, I use a practical and simple framework that has three broad categories or stages of trader development. The three stages are: 1) Those who are unable to recognize a pattern; 2) Those who can recognize the pattern; and  3) Those who can recognize patterns and take the necessary action.

Most traders never get to Stage 3, they may have periods where they exhibit Stage 3 behavior, but most end up falling back into Stage 2. The primary reasons for failing to stay in Stage 3 are issues with psychology, poor trade management, or poor money management.  Often, I see a connection between all three. In other words, problems with trade management and money management (position sizing) can often have psychological roots.

Some traders who get a glimpse of Stage 3 and fall back into Stage 2 don’t even realize why they were unable to spend more time in Stage 3. Other traders who fall from Stage 3 to Stage 2 have a sense of what went wrong, but rather then address the problem head-on, they spend more time dealing with patterns again (thereby putting themselves all the way back to Stage 1).  A developing trader must not only learn to recognize patterns, they need to learn how to recognize what’s needed to get to the next stage. Far too may traders think that pattern recognition is the most important aspect of trading, pattern recognition is very important, but without the ability to consistently take the right action, the best pattern recognition skills in the world won’t pay a dime and Stage 3 will remain elusive.  If you’ve fallen from Stage 3 to 2, or have never spent time in Stage 3 at all, do yourself a favor and assess why, and then develop a plan to address it.  Otherwise you will remain with the majority of traders who never make it to Stage 3, or don’t spend much time there.