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Achieving trading competence – part 4

By August 5, 2009November 8th, 2023Active Investor Psychology secrets, Uncategorized

The ultimate goal for the trader and active investor is to reach the point where trading becomes automatic. At this level all trades are simply executed according to a plan and the rules of their system(s) have become internalised to the extent that they are adhered to flawlessly, consistently and objectively without hesitation or reservation.

There is no emotional attachment to the outcome of any trade as the trader is at peace with all outcomes. The trader has reached a level of acceptance and understanding where their trading processes are completely and utterly trusted. Fear is overcome; the fear of losing, being wrong or missing out does not cause mental conflict of any sort at any time on any trade. This is inherent to the Unconscious Competent because they know that trust and fear cannot co-exist simultaneously, only one can be dominant in any given moment. They trust and are hence carefree yet not careless in the moment.

Winning trades, losing trades, break-even trades, winning and losing streaks, drawdowns and new equity highs are all accepted as the probabilities of their edge playing itself out in the market, in real time, just as the back-tested and historical trading results of the edge indicated they would. Essentially, trading their edge has become an automatic subconscious activity – just like reading a book, writing or driving a motor car, all of which were once conscious activities. Trading has become a habit. A habit that is founded on functional beliefs that are in harmony with the environment in which decisions are executed – the market.

At this level the individual has had so much repetition and practice with a skill it becomes ‘second nature’ and can be performed effortlessly without struggle, strain or pain. Perhaps it can even become ‘first nature’.

The process of being empathetic with market price movement becomes habitual and a part of the individual’s personality. At this level the individual’s subconscious has been programmed, through repetitive execution of mechanical edge trades, to operate with a market paradigm.

Although it is not necessary to achieve Level 4 to make consistent profits in the market and outperform the market indices, (Level 3, Conscious Competence, will achieve this) it is a worthy ultimate goal whilst on the lifelong journey of improving one’s active investment skills. If ever attained, it will affect performance very positively. If never attained, the endless journey towards the goal will still be sufficient to massively outperform the market indices and alternative investment avenues.

At this level, the framework of the individual’s trading system(s) has become a part of who they are; it is entwined with their life in the same way as cleaning one’s teeth or walking.

It is estimated that only 5% of active investors achieve either Level 3 or Level 4 of Competence when it comes to trading in the market! Astonishing! The other 95% remain ‘below the line’ in either of the two levels of Incompetence. The main reason is that achieving consistency, that is, sustained active investment success with a steadily rising equity curve, requires a major paradigm shift that most individuals have great difficulty making. The shift is typically prevented by current dysfunctional beliefs expressing themselves through self sabotage of the trader in the form of counter-productive thoughts, feelings, statements and actions.

It takes desire followed by conscious effort to step into a process of change to overcome the sabotaging beliefs. Ongoing discipline is required until the process of transition, that is dysfunctional beliefs are de-energised and new market paradigm beliefs are energised, is completed. “If you always do what you’ve always done you’ll always get what you’ve always gotten.”

Transition to Level 3 and then possibly to Level 4 can be achieved through the repetitive use of a researched, proven and robust mechanical trading strategy that has an edge. Mechanical edges emanate from the market and can be used as a cornerstone tool to create beliefs that are functional for engaging the market. Dysfunctional beliefs that are in conflict with the way that market communicates emanate from our time spent in society. A societal paradigm conflicts directly with a market paradigm. Stated another way, we are programmed to fail in the market unless we undergo a paradigm shift in our mental framework.

Reaching Level 4, Unconscious Competence, is the ultimate goal in any activity, however to outperform the market indices, Level 3 will do.


  • Ralph says:

    Hi Richard,
    The complexity disapears and that hurdle you just fly over when you have a set of rules to follow.
    My advice is get a system with a proven edge and trade according to the rules.
    I have yet to find better systems than the ones designed by Gary!!!!

  • Barry says:

    Hi Gary,

    As one who is involved in the education of others, I am a teacher of mechanical engineering, I read with great interest your series on the development of competence in trading/investing in the stock market. Your conclusion is that level 3 (conscious competence) can be reached and then possibly level 4 (unconscious competence) “through the repetitive use of a researched, proven and robust mechanical trading system that has an edge”. Specifically of course you mean your mechanical trading system. However, from an educational viewpoint if a person is simply following the rules of a mechanical trading system that has been developed by someone else, worthwhile though the system may be, the level of competence required by the person is low indeed and great ignorance of the stock market and the fundamentals of the companies in which that person is investing in would exist. Educationally this is not an acceptable outcome and it seems misleading to claim that a high level of “competence” in investing in the stock market can be obtained in this way. Having said all that I have been through your SPA3 system online with one of your consultants and would consider using your system as part of my trading strategy. For the moment however I am busy developing a wider competence through education and active investing.

  • Gary Stone says:

    Response to Comment by Barry:

    “Specifically of course you mean your mechanical trading system.”

    I don’t actually. Any mechnaical system with an edge will do. Trust is a big component so using one’s own edge would be easier to trust for most people. Developing your edge is tough and requires many pre-requisite skills but is a very rewarding process if you complete it. By ‘edge’ I mean one with a positive mathematical expectation.

    “However, from an educational viewpoint if a person is simply following the rules of a mechanical trading system that has been developed by someone else, worthwhile though the system may be, the level of competence required by the person is low indeed and great ignorance of the stock market and the fundamentals of the companies in which that person is investing in would exist.”

    The purpose of following the rules of a mechanical trading system that has been developed by someone else or yourself is not supposed to teach one the fundamentals of stocks or to overcome ignorance of the stock market. The purpose is to change the way that one thinks about how the market communicates its opportunities to an active investor and how the active investor reacts. The change in thinking is to acheive a mindset of consistency and objectivity with respect to trading. Consistency and objectivity is the essence of competence whether it be trading, playing golf or driving a motor car. .

    Deep knowledge about stocks and the stock market is NOT necessary to be a profitable trader. Having knowledge about technical analysis whether it be candlesticks, bar charts patterns or whatever is necessary but will not ensure profitability.

    What will ensure profitability is a mindset of consistency and objectivity and no amount or knowledge about the market or analysis (technical or fundamental) will ensure either. Consistency and objectivity are states of mind that can be honed through following a mechanical process that makes one consistent and objective in a mechanical and conscious manner first, i.e Level 3.

    To grasp these concepts better may I suggest that you read other blog postings and that you study (not just read) Mark Douglas’s book “Trading in the Zone”. Ensure that you do the exercise that is suggested near the back of the book.


  • Barry says:

    Hi Gary,

    Contuining our debate on competence, an area of continued debate in educational institutions, let me ask you the question of who has the higher level of competence: the person who developed the mechanical trading system or the person who follows the rules of the system and what type of competence are we talking about in each case? I would contend that the person who developed the mechanical trading system has a high level of competence in technical analysis and in the determination of the probability of an outcome. And because of this background knowledge this person would also have a high level of competence in using their mechanical trading system. The person using the system does not have the same level of competence since their knowledge is limited to the application of the rules of the system. Development of a mechanical trading system is a very different task to using the system and for any task the competence can range from being non-existant to high in line with the range from unconscious incompetence to unconscious competence. Using your example of driving a car, there exist some very good drivers and some very poor drivers, the difference in their competence is obvious to us all. Can the very poor drivers, although having been deemed competent to drive through having passed a driving test,ever become very good drivers? Many would doubt that they could no matter how much training they were given since there is something beyond just following the rules that makes a good driver, there is a process that takes place in a very good driver which very poor drivers can never achieve. The good driver is able to bring together a number of pieces of information in such a way as to enhance their driving ability. This high level of competence goes beyond the the training given by the driving instructor and is one of the areas which is difficult for educational institutions to assess regarding student learning. This highest level of the bringing together of knowledge is called synthesis and this leads to innovation and invention. It is the ability to be able to see and apply a connection between sometimes seemingly different areas of information to a new situation. The task of following a mechanical trading system would at first glance seem straightforward, but like driving a car there are those who would be better than others at applying the rules they are given. After all in the SPA3 system there is the choice of which stocks to invest in from amongst those that meet a given criteria. Within this task it would seem that not all would have the same level of competence since some choice remains and some are better at making choices than others and even though all may profit some would profit more,such is the result of different levels of competence.

  • peter says:

    Barry’s and Gary’s comments reminded me about what Curtis Faith said in commenting about the Turtles group’s differening success rates. Despite all being given the same trading rules (their edge)some made enormous profits, some made reasonable profits and some made poor profits. What differentiated them was their ability to stick to the rules (the edge). This is what Gary is saying. The ones who were less successful unconsciously or consciously sabotaged the rules. As an aside and supporting what Gary said none of the Turtles developed the edge. They merely had to implement it. So success doesn’t require the person to develop the edge it simple requires them to steadfastly stick to it.

  • GES says:

    Barry’s is an interesting argument. The apparent difference of opinion with Gary is probably more a question of semantics.

    Gary equates competence with successful application; his concern is not with the intrinsic level of knowledge his customers may have of investment in equities. His market is the everyday journeyman who needs not understand his trade; he needs only to ply it – to follow its rules conscientiously and in a timely manner. If the rules have withstood the test of time, then the journeyman who competently applies the rules will generally find success. A paradigm change does not form a part of this view.

    On the other hand, Barry sees understanding as an integral component of competence. As he states in his first comment, ignorance of his medium by our practising journeyman is “educationally …. not an acceptable outcome”. From the standpoint of an educationalist whose responsibility it is to facilitate understanding, that is an entirely reasonable statement.

    Barry’s goal is to impart knowledge; Gary’s to provide the rules to apply it. It is often said that too much knowledge will hinder rather than help its practice – one can end up not seeing the wood for the trees. Perhaps this contributed to the old adage: those who can, do; those who can’t, teach.


  • Marius says:

    I think what Garry is trying to say in his reply to Barry’s comments is that you don’t need to know how to design an alphabet in order to learn to read. Nor does designing one make you an avid reader, and it’s in the reading, not the designing that the rewards lie.

    Of course, it’s much easier to understand and trust the directions the market is giving you, when they are written using your own words.

  • Gary Stone says:

    Response to Comment by Barry:

    “…let me ask you the question of who has the higher level of competence: the person who developed the mechanical trading system or the person who follows the rules of the system and what type of competence are we talking about in each case?”

    The person who develops the system has a higher level of competence for developing systems but not necessarily executing it. Developing the system undoubtedly requires a sufficient level of competence in various skills and sufficient knowledge in areas such as technical analysis, statistics, computer programming, edge thinking, concept creativity, markets (brokerage, liquidity, different investing instruments …), plus much more.

    The person who executes a system also needs to be competent but the type of competence (as you correctly ask) is different and does not need to be the same as the system developer. The degree to which the executor has developed a mindset of consistency and objectivity is the degree to how much better they will execute than somebody who has not developed a mindset of consistency and objectivity. Their competence or knowledge need not be high in technical analysis, statistics etc. It is this difference in competence in consistency and objectivity that causes different people trading the same system to achieve different outcomes (as Peter above pointed out with the Turtles).

    A lower level of execution competence (too much inconsistency and subjectivity) manifests itself through trading errors of entering and exiting trades too late or too early or not at all or taking trades that shouldn’t be taken or by placing too much or too little capital into trades or in the market as a whole. The inconsistent subjective trader (typically a discretionary trader) will always try to justify that they did not make a trading error which is easy to do as they have no benchmark like a mechanical trading system against which to measure the making of trading errors.

    I truly believe (as do others like Mark Douglas and Brett Steenbarger) that one’s level of trading competence can be greatly improved by stepping into a process of trading with a mechanical trading system and thereby moving along the path to consistency and objectivity. Achieve this mindset and the positive outcomes will flow.


  • BG says:

    Barry’s view of system design competence, as in knowledge synthesis, being necessary for complete trading competence and therefore a long-term successful outcome has its merits. For example, without system design knowledge, it may not be possible to verify that a mechanical trading system is actually maintaining its positive edge. This is something that you have to trust based on historical results, but historical results may not always be an indication of future results – as Gary often says “Anything can happen”.

    From what I understand of designing and maintaining mechanical trading systems, there should be continuous monitoring and analysis to ensure that the positive edge is being maintained, and if not then there may need to be adjustments made to system, or in the worst case, drop the system and start again.

    Using the car driving analogy, a car driver can become a great driver (unconsciously competent) without knowing how the car works or how to maintain it, but the driver has to trust that the car designers, builders and maintainers are also competent. This trust is usually also based on historical results. If the car breaks down, then this is a quite obvious ‘system’ failure, and so then the driver would have to refer to the maintainer who also may then also refer to the designers and builders.

    A ‘breakdown’ of a mechanical trading system may not be so obvious – it could just result in a slow loss of equity (drawdown) that never recovers – or it may be shockingly obvious by a very rapid loss of a large amount of equity due to an extreme ‘black swan’ event for example.

    But I’d suggest that an individual using a mechanical trading system can still achieve a certain level of trading competency, as per a car driver, in the sense that they are “driving” the system without knowing how it works. They can follow the rules of the system, and trust (hope) that the positive edge shown from historical results will continue to be achieved in the future.

    The mechanical trading system designer, on the other hand, could/should track that the positive edge is being maintained as per historical results, and so can therefore perhaps have ‘greater’ trust in that the system is still working as designed.

  • richard says:

    Great stuff Gary. I agree wholeheartedly with what you say and your succinct expression.

    My next step (if it were possible, which it prob isn’t) is to work with/ be mentored by a level 3/4 trader as MENTOR. I remember working with a boss like that during my career and I learnt so much, besides enjoying my work. Such bosses are are a rarity though.

    I have learnt trading by reading & trying out but I always come up against the complexity hurdle – when I analyze a possible trade there are too many possible outcomes, many equally possible (eg go one direction on reversal vs go other direction on continuation pattern). The reward/effort is too small so I end up with analysis paralysis and refuse to enter at all.

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