- 1998: Volume 7, No. 5 Guide to Using an Advisor

"You can't teach a new dog old tricks."—Warren Buffet

One could start out by asking why use an advisor at all? Access to information, analysis, and advice is unprecedented. The answer could be that beginning traders are not short of choice; they just don't know how to choose. They either choose a service/system with an unrealistic track record, or one that is totally unsuited to their temperament. The inescapable fact is despite the exponential increase of information available, the percentage of traders that lose money year in and year out remains constant. The industry average seems to be around 75 percent. However, despite this gloomy scenario, the beginning trader assumes he will automatically go straight in to the elite 25 percent division of winners. Sad though it is, most beginning traders' egos are usually larger than their trading abilities. Unrealistic expectations coupled with lack of experience is the reason why so many beginning traders burn out their accounts within a few months. Most rookies severely underestimate the difficulties they will face. Any skilled occupation requires some form of apprenticeship. A trading advisor can make that apprenticeship less painful, and less costly than finding out everything on your own.

The type of advisor you require depends on what type of trading analysis you use. If your trading is based on some form of subjective analysis such as Elliott Wave or classical chart pattern analysis, the benefits of having a guide with 10 to 20 years experience looking at the same market can be immeasurable. They will see things that you don't, and temper a beginner's enthusiasm for interpreting patterns or counts where they don't exist. If you already have some experience, it is also invaluable to have another set of eyes looking at the chart, if only to play devils advocate to your own interpretations.

People who deploy a completely mechanical system might need an advisor of a different sort. Their problem might be relating to their system's method of identifying opportunity, particularly if it has had a string of losses. Pulling the trigger might then be a problem. They might need a different kind of advisor such as a trading coach, who could help identify the psychological blocks that trader might have in trading his system.

Trading is a solitary occupation. An advisor can add value by entering that process and affecting it in a positive way—either by presenting you with possibilities you would not have seen by yourself, by providing you with a "trading conscience," i.e. enabling you to continue to consistently act on what you already know, or by guiding you through market situations where only experience counts—where trading books/hotlines/systems are not situation specific enough to be of practical help.

Avoid advisors who do not give specific buy and sell advice. Pontificating about the Bundesbank's role in European Monetary Union may be very interesting, but will probably not make you a dime or help you grow as a trader. Intellectualizations cannot be quantified objectively, and can always be reinterpreted or retracted after the fact. Witness all the analysts who claim credit for predicting the '87 crash.

An advisor should be committed to his methodology to the point where he backs it up with specific entry, stop-loss, and profit levels. Be skeptical, ask for a free trial so you can monitor the results in real-time for yourself. This way you can judge his methods by the only yardstick that counts: the market. If you don't have access to real-time quotes, most exchanges now post time and sales data on their web sites, so you can see for yourself the integrity of fills and suggested levels of execution. Further, there are independent tracking services that monitor advisors if you wish to research their results over longer time frames.

Another important stipulation is that the advisor should also be a trader himself. If you are buying a mechanical/computer based program from a systems vendor, he is more than likely to be in that business, not the trading business. His income is derived from selling people systems, not trading. He will not be there to tell you what to do with your anxieties when the system has 12 straight losses—and a good system can have that. Having a good system and being a good trader are not the same. A beginning trader is just not prepared for the emotional pitfalls that await him. If you have no guide at loss number eight, you might never get to make trade number nine which will be, of course, a big winner. Unrealistic ideas about how easy it is all going to be, coupled with slick marketing from systems vendors, ensure that most beginning traders quickly enter into the group that is the Darwinian necessity of the zero sum game—the losers. Most traders don't know that they don't know, therefore they don't think they need help. They stumble from one system to another without learning anything. Most traders also believe they can learn all by themselves. It is widely believed that it takes a trader between five to 10 years to reach a level of competence where they can operate safely in the market. It should be understood therefore that traders need an education in interacting with the financial markets not a miracle system, because even if someone gave an inexperienced trader a miracle system, he probably wouldn't have developed the skills necessary to trade it.

It probably takes traders as long as it does to reach proficiency because most of them never start at the beginning. Most people wander into the markets encouraged by rags to riches war stories. They believe the market is an event. It isn't—it's a process, and like anybody in any profession you need to learn that process, and accept it isn't going to be easy. The easiest way to start is at the beginning, and accept that you don't know, but at least you know you don't know. Having an advisor who is also an experienced trader can cut the learning curve, and can make the process less devastating both financially and emotionally. Books about trading are helpful in a general context, but if you have a specific problem with your system, your attitude, or your ability to pull the trigger. It can make a world of difference to get specific answers to specific questions, and to have a dialogue which is directly relevant to your situation.

What an advisor has to offer most is his experience. This is what sets him apart. He should have graduated magna cum laude from the School of Hard Knocks. These are his credentials. He is not giving away any secrets, and you should avoid the ones who claim they are. Traders should go to an advisor for advice and not dependence. You should not pay an advisor to take responsibility, that you will have to do yourself. In fact one of the valuable things an advisor can teach you is to take responsibility for all your trades so they can be put in context, and learned from. This way you can learn and grow as a trader. His methodology therefore should be fully disclosed to the point that eventually you can do it on your own. Black box systems should be avoided. Choose an advisor who both fully discloses his methodology and educates you in the trading process. This way you can develop as a trader, and make adjustments as you advance. Make sure you are fully conversant with what is done and why. Otherwise it could be like finding yourself alone at 50,000 feet on auto pilot. Very scary if you don't know how to fly the plane. Gurus should also be avoided. You want to become the best trader you can be, not someone's disciple.

One final note. Once you have selected an advisor, make sure it is just one. Combining several advisors is like having an investment committee whose collective intelligence is the IQ of the least intelligent member, divided by the number of it's members. Once you have selected that advisor, you have to make a commitment to follow their advice to the letter. Understand he will neither be able to protect you from market behavior, nor can he turn the market into a predictable event where you can just sit back and be spoon fed winning trades. An advisor is not a shortcut. An advisor is a guide, somebody that can help you focus on the elements you need to learn. He cannot help you side step the market when it comes at you, this isn't his function. His function is to teach you to react to the market intelligently, in a consistent and disciplined manner. If you are always jumping advisors at the first sign of trouble you will never gain the benefit of any of them. No matter if you pay a guru thousands of dollars a month, or spend a fortune developing your own system, the perfect system of the past will not protect you from the imperfect market of the future. Adversity is part of trading, dealing with that is more important than trying to predict the future, or trying to find someone who can.

In his fabulous book on trading discipline, The Disciplined Trader, Mark Douglas admits he had to lose everything he owned before he found out what it took to successfully trade the markets. This illustrates the hard way of finding out. Your education does not have to be so painful.

Colin Reed is editor of Chart Pattern Analytics, a market advisory firm specializing in classical chart pattern analysis. For more information, visit www.chartpatternanalytics.com