Becoming profitable in Forex is a process – like any other profession, it requires competency training.

The process of training the mind and acquiring the necessary TA and market skill to obtain Competence and trade successfully takes time. Psychology’s competence matrix (often used in both education and change management disciplines) has much application to trading. This article looks at how the sequence applies to the process of acquiring trading competence, trading profitability and account balances during each phase. It also provides an approximate time frame for each stage.

Stage 1. Unconscious Incompetence – Losing Money – Minor Red Account

In the unconscious incompetence phase, we don’t know yet what it is that we don’t know (aka ignorance is bliss.)

Sitting in the Forex saddle for the first time is exciting, but it’s also precarious. Some traders manage to make good progress on the first live debut, but eventually the knowledge vacuum and pressure of live trading takes over causing higher levels of risk-taking, compounding the losses problem. At this stage the Trader may also be embracing unrealistic grandiose expectations or have an exaggerated self-assessment of their trading prowess, the type of projections that are not anchored in realities.

This is called the unconscious incompetence stage. The trader “thinks” they have the required knowledge and strategy to make Forex work for them (from demo trading) but don’t yet know what it is that they don’t know – about the market and about themselves as traders. Market has a way of letting the trader know what the knowledge gaps are, fast.

Approx. Time Frame: 0-3 months.

Stage 2. Conscious Incompetence – Still Losing Money – Deeper Red Account

In the conscious incompetence phase, the trader has arrived at the point of recognizing the knowledge gaps – we know for certain now that we don’t know enough.

In this phase, the trader sees what they are doing wrong and what the knowledge gaps are, but has trouble fixing the problems. The account at this stage keeps getting redder as losses accumulate. This evidence is highly confronting, things are not going to plan.

This is the stage where the trader needs to make a conscious choice to begin seriously working on themselves and their trading system. It’s also the point where many new traders quit. The trader becomes fully and acutely aware of the many nuances of the market. The TA that looked so reliable in demo is failing far too often in the heated environment of live trading. Acquiring experiential knowledge of precisely how this market works; what can go wrong; how the trader’s judgement can be clouded; trading discipline; locating a TA system and trading routine that delivers the goods – these themes become the primary challenge. The trader has an important choice to make – meet the challenge and get across the issues, or quit.

Approx. Time Frame: 3 – 6 months.

Stage 3. Conscious Competence – Breaking Even – Account Holding Steady

The conscious competence stage arrives when the trader has begun addressing trading problems and started refining their trading system and personal discipline to a greater level of precision. Respect for risk is at a peak (thanks to losses and red numbers up to this point.) The trader takes great care in opening a new position, doing everything necessary to maximize the chances of success and reduce the risk of loss. At this stage, the trader is reluctant to let profits run, preferring to take profit, while confidence and knowledge builds.

Conscious competence is arriving – we now know with increasing certainty that we know how to do this – trading is starting to look very do-able, there’s a light at the end of the tunnel. The trader is getting it right with increasing frequency. Confidence is building. The trader’s brain is in the process of being programmed to trade successfully. The trader is working hard, thinking carefully and fully, applying rigorous care to every trade. This is the most lengthy, time intensive and effort intensive phase of the competence matrix.

The trader is no longer losing money, but also not making much money either. The breaking-even phase is nevertheless a huge achievement, and the essential precursor to the final stage.

Approx. Time Frame: 6 months to 3+ years.

Stage 4. Unconscious Competence – Making Money – Green Account

The final stage of the competence matrix is when the account begins to put consistent positive runs on the board. The trader begins to make money regularly. Trading profitability has shifted from having to think / work hard at it, to a stage of being clinical and instinctive. The red account begins to claw back drawdown and then turn green. When losses have been fully recouped, this is when the trader knows they have graduated and are ready to trade in a professional sense.

In this phase, trading successfully and profitability has become a much more automatic process – one that continues to evolve with an increasingly higher success rate. The trader recognizes the entry set-ups automatically, has the detailed knowledge, skills, discipline and market experience to make the right decisions at the right time. Trading begins to seriously work for them.

Trading profitably has become second nature. The trader’s brain has been successfully programmed to trade with accuracy and precision. The trader has acquired a level of instinctive professional competence.

Approx. Time Frame: 12 months – 5+ years.

Summary
Building up the credit balance in the trader’s personal knowledge bank is an essential precursor to building healthy trading accounts. Programming the mind to trade is part of the process of acquiring competency.

Experienced traders who have come through the school of hard knocks process often lament “if only I had known in the beginning what I know now, and still had the same funds available, how different things might now be.” Hindsight is a wonderful teacher. Make some allowances for the competency learning curve.

While there is no hard and fast rule about the time sequence for each phase of acquiring trading competence (since this is entirely dependent upon the trader’s personal capabilities), there is nevertheless, a distinct process that every trader goes through. Plotting where you are in the competence matrix at this present moment in time can provide a realistic indication of what is left to accomplish and how long it may take.