The Knowledge Gap

My youngest daughter is nearly two now. She’s at that amazing stage of life where her head is like a Dyson for information, sucking up incredible amounts of knowledge during every waking moment. She constantly surprises and delights us with new words and phrases, and half the time we have no idea where she heard them. (I suspect she has a secret nocturnal life, sneaking out of her bedroom in the wee hours, and meeting up with other toddlers to compare notes. Mrs Walsh does not share this theory).

Almost from the day we are born, we’re taught — or perhaps genetically programmed — to seek out knowledge. In the first hours of life, it’s all about learning where the milk is. Later, it’s about mobility; learning to shuffle around, crawl, and ultimately, to walk. Then comes communication. Listening, understanding, talking, reading, and writing.

It doesn’t stop there. We’re sent to school for years, and then college, and if we so desire, onwards to university. Up to two decades of life in full time education, learning every single day. When we begin working, we continue to learn more and more. Specialised knowledge, perhaps unique to our field of employment.

It is therefore, entirely unsurprising that when we try and accomplish something in life, and find we don’t get the result we desire, that we immediately assume a lack of knowledge is the problem. More often than not, we’re right.

Yesterday, Mrs Walsh decided to bake some cookies. Now Mrs W is an excellent cook, and I aspire to one day be able to rustle up meals of the same quality that she manages apparently effortlessly. Cookies though, are not her strong point. Spotting a gap in her knowledge, she prised the iPad out of our daughter’s hands and looked up a bunch of recipes, filling in the information she was missing. I am pleased to report that this endeavour was a success, and that the resulting cookies were excellent.

There is a point to this illustration of domestic bliss, and that is that the desire to plug the knowledge gap is so deeply embedded into our programming, that we don’t even notice it. And this can be a problem, because sometimes, our lack of results is not due to a gap in our knowledge at all.

Trading is one example of such a situation.  Here’s how most people go about learning to trade (myself included):

1) The decision is made. “I want to be a trader!” we cry with glee.

2) Information is sought (we have a huge knowledge gap, so of course we want to fill it). “I shall read some books! Take courses!” Motivation is high, and our thirst for information is strong. We devour everything we can find on the subject.

3) We try and apply the knowledge we have learnt. “I’m going to make some trades!” We’ve read a ton, and it sounds simple enough. What could go wrong?

4) We lose money.

Okay, step four doesn’t always involve loss from the outset, but in the vast majority of cases, new traders don’t immediately see the kinds of profits they were hoping for when they started out.

It’s at this point that our life long programming kicks in. “I must be missing something,” we think to ourselves, and we try and plug the knowledge gap. We assume some vital piece of information has slipped us by. Did we skip a chapter? We go back and read more, learn more, study different books. Then we try again.

If we still don’t get the results we want, we repeat the process. Perhaps, we ask ourselves, there’s some secret that isn’t shared in the textbooks. Perhaps we can only get this secret from other traders. We delve into forums and websites and chatrooms and seminars. We learn indicators and systems and strategies of ever increasing complexity.

Here’s the thing: by step four, we almost certainly know enough already. A gap in knowledge is rarely the cause of failure to profit. Most people who have studied trading to the point of taking live trades, but who aren’t making the kind of money they want, already have enough facts to turn things around. There’s a critical mass of information required to succeed, and the majority of people who are trying have already reached that mass. Learning more than is necessary only serves to confuse them even more.

Here’s a completely different analogy that I hope will illustrate the problem. Imagine that you needed to build a house. You learn that you must dig a foundation and fill it with concrete; that you’ll then build some walls out of bricks, add a roof structure, and cover it in tiles. That’s one way to build a house, although not the only way. If you’ve never actually built a house before, the chances are your first effort might not be great. The foundations may not be level on the initial attempt. The brickwork might not be very straight or true, and the roof could end up a bit wonky. But your basic knowledge is sufficient to overcome these problems; more practice is what’s missing. Every layer of bricks you lay will give you experience, and each one should get a bit better.What you don’t need, is to learn how to build timber-framed houses, or steel-and-glass construction methods, or how to build with straw bales, or how to put together a skyscraper. There’s nothing wrong with any of these techniques, and knowing them isn’t a problem in itself. But if you’re starting out, and you’re trying to get a roof over your head, adding those different construction methods will only serve to confuse your own build. The added knowledge is superfluous. You may conceivably start mixing techniques, creating a building that’s unsafe for habitation.

So what does this all mean for you? It means that if you’re trading, and you’re not getting the results you want, take a step back and look at the knowledge you already have. Don’t assume there’s a gap in that knowledge. Remember, all you need to know to make good consistent profits are three things: what to trade, when to enter, and when to exit. If you have a basic strategy that covers those three things, you already have all the knowledge that’s required. Anything over and above that is unnecessary added complication. Stick to a simple proven strategy, and keep at it until you make it work.

As a final word on this (because I know I’m going to get emails!), I just want to reiterate that knowledge is a Good Thing. I’m not saying don’t keep learning. We’re always learning, all the time. What I am saying is that a gap in knowledge isn’t always the reason for not getting results. In trading, it’s rarely the reason. A gap in *experience* is usually the culprit. My message is always the same: trading is simple. Keep it that way, and you’ll make good money.

5 thoughts on “The Knowledge Gap

  1. Darren Maxey

    Hello Mr.Walsh

    I love your book, and would loke to say thanks for all your help.. And please make more Youtube vedio’s
    I have not put it all togather just yet but will your help I will soon.

    THANKS, Thanks. . is there a sit next to you that I can look at just how you do it each trade?

  2. gene Iloka

    I am brand new in this. Don’t know a thing about trading stock. Recommend a good book to help me lay a good foundation. Thanks.

  3. Hakim

    Hello Harvey,

    I like what yiu are doing and I la one of your best fan, you are a source of inspiration.
    Which broker are you using and do use any screener?

    Thank you

  4. Heather

    Your books are wonderful. In reading your blog post about new traders not lacking knowledge, I agree and don’t agree. In my case, I win a little and then start losing. I go back to your book — How to Day Trade — and win a little and then start losing. Your book is amazingly good the one revision I would make is to recommend in your book to newbies like me that they review your book every couple of weeks until they are steadily making money. Also that newbies read your blogs to be reminded of what is in your book with different examples.

    Thank you so much for sharing your knowledge. I have bought your new book.

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