Crypto traders are made with soft skills
Are traders made or born?
This is a debate the legendary Richard Dennis described in Jack Schwager’s first book: Market Wizards.
He decided to settle a debate about whether traders were made or born with an experiment.
So he taught a group of new traders a system to trade markets and examined their performance.
What he discovered was that traders that followed the system and didn’t deviate from the process made money. A lot of it!
So Dennis proved that traders can be “made” given they have a system, understand how the system works and execute the system even through drawdowns.
What he also said was important, was that these traders were expected to add their own judgment, insights and interpretation to what he showed them. The soft skills.
Now your system is what you are developing as you make your trading journal and work on the results. Part of your system also involves figuring out what trading style works best for your personality and skillset.
Over time your trading principles will become the foundation for your trading system.
But there are other skills that a trader needs to be successful.
Many of these skills require time and practice to develop. All of them are transferable across other disciplines and parts of your life. These are the “soft” skills that don’t come with a certificate, recognition or accolades.
Yet they are essential for supporting your trading activities in any market.
Hard won soft skills
The skills a trader needs to function from day to day will rely on ongoing experience and development. There is no manual for these skills. They will come as a byproduct of working on your system and process.
As your crypto trading activities move from erratic and on the fly to focused, thought out and studied, these skills will develop more fully.
So what are these soft skills? They include:
- Pattern recognition
Pattern recognition is a built-in feature of most human beings. It’s part of our survival mechanism.
But as a trader, you need to be able to look at patterns and add interpretation.
There are various kinds of pattern recognition, but here, the focus will be on personal pattern recognition and technical pattern recognition.
The first form of pattern recognition is your internal response to market events and conditions.
Do you react internally the same way to the same types of market behaviour each time?
Like when the crypto market is dropping, do you feel a little bit sick or anxious? Or does that only happen when it drops a lot?
Then what happens? What do you want to do, and what is the correct action to take under the conditions?
On the other hand when your positions are in the money, do you find yourself getting giddy? Or thinking of what you will buy with your gains?
What happens when you start feeling this way? And what is the right action to take based on observation and experience?
Take these patterns of internal reaction and use them as information for your trading approach.
Then comes the patterns on the charts.
In trading, there are a variety of analytical approaches you can use depending on the asset class. Often these are broken down into two branches: fundamental and technical.
For crypto traders, the overwhelming focus will be on the technical or chart patterns.
Now reading charts is a skill that you can learn but that’s provided you don’t overcomplicate things. Simple chart indicators can be useful provided you understand why they are essential and have the flexibility to adjust as the patterns evolve.
Chart patterns work increasingly on a sort of confirmation bias. The more people believe the pattern, the more likely it will work. But conditions change.
So, are you going to keep selling “resistance” if these patterns become upside breakouts on volume?
Or buy “support” that starts developing into breakdowns, setting new lows and ranges?
Chart reading in part is about various patterns, indicators and historical examples, but then there is the interpretation.
Is this a pattern that everybody else sees?
Or is it a pattern that can be exploited in the opposite direction by larger players working against smaller, less experienced traders?
Be careful with curve fitting through backtesting. Patterns work until they don’t. Backtesting and curve fitting can show you what worked yesterday. However, in reality, it might not work today.
Pattern recognition is a skill that will help you stay focused on what is happening rather than what you think is happening. It is developed through time and experience.
Pattern recognition combined with expert interpretation are keys to successful trading.
Being capable of changing your opinion and thinking is a key skill for any trader.
Once you have a core set of principles, your actions are guided by your trading plan as it is tested by the behaviour of the market. And as the market changes, you will need to make changes.
If your strategy isn’t working, it may need some incremental adjustments to improve outcomes. Small changes to an existing approach are less mentally and emotionally challenging than complete strategy changes.
You may have different ideas about the asset you are trading based on different time frames that can be executed independently.
For example, you may be bearish and yet decide that based on your evaluation in the short term, you need to be long.
Or you may be long term bullish, but see that it’s time to lighten up or sell in the short term as sentiment and activity begins to change.
Having conviction is important, but the goal is to increase your profitability. So “being right” isn’t relevant.
The need to be right is one of the most expensive needs in any market, and it is a demonstration of a lack of adaptability.
Understanding your interpretation of a market move and what steps you need to take to avoid further losses, or to increase profits, means being adaptable.
Adaptability is the difference between becoming a long term market player and shattered dreams.
Your ability to evaluate the validity of what you see and hear is a critical component to your success as a trader.
Learning to develop sound judgement can help you navigate the white noise of anonymous opinions, promotional activities and the many other distractions that you will be subjected to.
All those blog posts, articles, videos and forum posts have a purpose. They are designed to influence, persuade and shape your view of the world (and the crypto market).
But they will never take responsibility for your results. That’s your job.
Nothing is ever as great as they say it is, nor is it ever as bad.
Discernment means thinking for yourself, using your own judgement and drawing on your own personal experience to make decisions.
In life and in markets, discernment is a key form of ownership and agency.
And if you want to be a successful crypto trader, you must own your thinking and trading results.
Being a skeptic has received a bad rap in recent years. It’s a term often used as a pejorative or negative characterization of someone’s opinion.
But being skeptical and questioning the things you see and hear is an advantage for a trader.
Remember, it’s your money on the line. It’s your emotions that you have to deal with based on the outcome of your decisions and actions.
That means being skeptical of the motivation of people providing tips, “special” information, inside knowledge or anonymous advice on what you should (or should not) do in crypto.
Be skeptical of their claims, motivations and realize that they may have underlying incentives you are unaware of.
The crypto network has a built-in trust mechanism for the verification of a transaction. But it doesn’t help you with the decisions that influence the transaction in the first place.
In a world inundated with opinions, content and “facts,” skepticism is a skill that will help you survive in the market over the long term.
When you are dealing with profits and losses, everything inside you becomes amplified.
Trading crypto or any other asset will bring your demons to the surface and force you to deal with them.
Trading will show you in painful clarity every weakness you have inside including the ones you don’t want to see and the ones you may not realize are there.
Everything you believe about money and wealth, both positive and negative, will be magnified through your feelings and actions.
This is ok and part of the trading development process.
Being able to look at what you are feeling and understand the source and the trigger in your actions is incredibly valuable.
Self-evaluation is part of the thinking taking place in your trading journal.
It helps you understand your reactions to market conditions and results. It provides information about who you are. It’s intuitive knowledge about what your senses are telling you as you trade.
Self-evaluation isn’t an optional skill.
These issues will come to the surface. And you need to understand and harness them to succeed.
So embrace self-evaluation and use the information to your advantage.
This is a special skill that you can learn over time. It means the ability to separate events or situations in ways that alter your perception of them.
In startup land, this would be like understanding failure as a mistake to be learned and built from. Mistakes as part of a process are neither threatening nor harmful.
Here mistakes move from emotional to informative.
In a trading setting, an example would be something like “playing with the house’s money.”
This is where you have a big gain and you decide to push your advantage based on your analysis of the situation.
The house’s money is the gain. Your money is the principal.
By categorizing the gain objectively (the house’s money) it relieves you of the psychological pressure to sell before you should. After all your money (the principal) isn’t at risk. So you have nothing to lose by pushing the envelope (with appropriate risk management stop losses in place, of course).
It removes the lethal expression of neediness that will cloud your judgement and distract you from your updated trading plan.
Compartmentalization allows you to step outside the relationship with the money and see it as something less internal and emotional.
It means being able to see a $1,000 loss not as a loss of retail value, but as a part of a trading process. Losses are pieces of information offset by gains in an ever-changing fluid process.
When you develop this skill, you will be able to relieve yourself of certain psychological pressures by having the ability to adjust how you choose to interpret them.
Remember, Bitcoin doesn’t know you own it. Neither does Ether.
This applies for every asset on the planet, physical or digital.
Think about how that one realization can alleviate you of the emotional burden of ownership and, as a result, enhance your decision-making.
This is compartmentalization.
Discipline is a word sometimes too infrequently used in modern language and thinking. However, it is a key component of successful people, especially in a trading setting.
Discipline implies a set of rules and principles that are being followed to achieve an outcome.
Crypto traders that are using a trading journal are developing these principles with each trade and experience in the market. Discipline means following the rules and principles you set out for yourself.
That means if you have learned that adding to a losing position is bad for your profit to loss ratio you don’t add.
It means that if you wrote down in your journal that you will sell your position based on a drawdown of a certain percent, you do that.
Or the minute you feel giddy about your gains you go and sell a bit…
It means that you complete your trading journal for each trading session, review and adjust each and every day. Discipline.
The ability to execute your vision, follow your plan and learn from your outcomes is discipline.
And discipline has another essential element, it keeps you focused and rational when market conditions are in flux and chaotic.
Discipline is the difference between the successful trader and the failed one.
A system enhanced by soft skills
Trading is an expression of life but accelerated to extremes. All the skills you learn trading crypto will have broad applicability beyond the market.
Discipline, discernment and adaptability are widely revered skills that can only be displayed by example.
Skepticism, compartmentalization and self-evaluation are deeply personal skills.
Pattern recognition is a part of your nature as a human being.
Together, these soft skills help to provide your trading foundation as you develop your system and become the trader you want to be.
Bitvo is a state of the art cryptocurrency exchange founded by entrepreneurs with financial backgrounds. With a strategic relationship with a schedule one Canadian bank, Bitvo provides cryptocurrency traders with the ability to manage their assets how and when they want to. For more information on trading with Bitvo, click here.