How Specialization Can Help You Become a Better Trader Faster

12/29/2009 12:01 am EST


Ron Wagner

Principal Partner,

I was recently discussing the learning curve of trading with a student, and he asked me what I thought was the single best thing an aspiring trader could do to speed up the learning process. He made sure to place a few stipulations on the question based on his own experience. For one thing, he pointed out that he was already reasonably disciplined, had received a decent amount of education, and was, by nature, very dedicated. With all of that already in place, what then should he focus on?

This trader obviously thought I was going to say "experience" because he already began to mouth it as I gave my answer. However that wasn't the first word that came to mind. After all, he was asking how to speed up the learning curve, and a ton of "experience" losing presumably wasn't what he had in mind.

No, the word that came out of my mouth was "specialization."

Trading specialization is one of the most important stages that aspiring traders can reach in their development. In fact, the sooner they reach this place, the better, and I'll tell you why.

When you step out onto the trading battlefield, you are instantly pitting yourself against an extraordinary array of competitors. There are literally millions of others out there who want the same money that you want, and the laws of the marketplace simply preclude everybody walking away with bags filled with riches. In fact, most will walk away with significantly less wealth than they started with.

Given this intense competition, and the limited space inside the winners' circle, do we really want to go out there and compete half-heartedly in a whole host of events, likely losing at all of them? Wouldn't it be a much better idea to become an absolute, top-of-the-line expert in one area, and then go out and win the field in that specialty? You can take my word for it, the answer is a resounding yes!

As far as specialties go, there are quite a few to choose from. I will list some of the categories of specialization that traders can use to distinguish their approach:

Time Frame: This is one of the first and most basic distinctions that we can make as traders. While the thought of mastering every single time frame is appealing, and it may in fact be our long-term goal, we don't have to do this all at once. Pristine offers education in all of the various trading intervals, including micro, day, guerilla, swing, and core, and yet, we would do well to choose one or two to focus in on at first. Even if you are spending your days in the Pristine chat rooms, you can still choose to restrict yourself to a couple specific styles being taught there, while at the same time keeping your ears open to learn more about the other time frames. That's one of the greatest features of those rooms: They have something for everyone!

Patterns: We can further restrict ourselves by limiting the number of patterns we choose to play. Here too, Pristine offers a tremendous array of options, and we would do very well to gravitate to just one or two that make the most sense to us. Perhaps we are willing to operate in several different time frames, but we choose to limit ourselves to playing only one specialized pattern in all of them. I have met traders like this, and it was obvious that they did very well using this approach.

Direction: Nobody says that you have to make this distinction, but I'm listing it because it has made such a difference in my own career. As I have already said, I personally trade long for the majority of my trades, and limiting myself in this way really does wonders in terms of reducing confusion. One could theoretically be either a "long specialist" or a "short specialist," but the point would be to know the subtleties of spotting either strength or weakness in the stocks you trade. I could spend an hour just explaining the importance of this, but again, this is simply an option, and certainly not a requirement.

Sectors: There are many traders out there who specialize in a particular sector, or sometimes a few select industry groups that they understand very well. Perhaps the trader has a professional background that they can bring to bear regarding those companies. Or perhaps he or she simply likes the way they trade. Either way, narrowing the field in this manner is yet another way to become an expert in one segment of the market.

Market Stages: Some of us choose to hone in on one of four market stages as our chosen trading environment. For purposes of making these distinctions, there are really three categories: Uptrend, downtrend, and consolidations. I have met several traders who actually do best in a range environment. Others love it best when the market is tanking. The majority, however, will probably gravitate to powerful stage II uptrends on their time frames of choice. Again, it is highly admirable if a trader can seamlessly glide between the various market stages, however, there is also nothing wrong with specializing in one type of market in particular. Each of the market stages appears several times a year on the daily and weekly charts, and many several times per week or day on the shorter time frames.

Anyway, these seem like a decent sampling of specialty categories. There are certainly others, but this group leapt out at me first. It is fine to mix and match between them, as long as your final criteria exhibit enough restrictions to qualify as a true specialty. I, for instance, limit myself in all of the above categories and have a bulletproof trading and investing plan that I have not changed for the past eight years. You wouldn’t want to change your plan if it were producing consistent returns for you and your family.

And now, I’m off to try snowshoeing for the first time. And this is not one of the Wii games. If I’m not heard from soon, send out the dog sleds, and make sure it’s one of those big dogs with the keg around its neck! I may need that.

By Ron Wagner

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