Lesson 8: Personality And Trading

Just like markets have their structure, Individuals have their nature. Our interactions with markets force us to develop trading systems that are in tune with our personalities. 

Genetics, character, and habits are the key components that make up our personalities. Good trading is about capitalizing on our strengths. A person wired to think fast is likely to enjoy short-term trading and fast markets. He performs well in volatile bear markets. 

An aggressive person should develop trading rules to tame his aggression from interfering with his trading performance. Understanding ourselves can therefore act as an edge in the markets. 

Psychologists have come up with personality types intending to explain behaviours. In the same situation, no two people behave similarly. Different psychometric tests are used to group behaviours. 

The most accurate psychometric test is the BIG FIVE OCEAN test. It compares people across five main character traits, which break into ten subdomains. They include; 

O – Openness and Intellect 

C – Conscientiousness which is broken down into orderliness and industriousness 

E – Extraversion broke down to assertiveness and enthusiasm N Neuroticism which breaks down to volatility and withdrawal A – Agreeableness which associates with compassion and politeness

Openness is the primary dimension of creativity, artistic interest and intelligence. People who score high on this trait are generally creative. They tend to be very good at pattern recognition. I recommend traders who score high on this trait try and trade using patterns. 

When someone scores high in conscientiousness, they are likely very dependable and organized. Also, High conscientious traders tend to be able to control impulses. Studies have shown that being conscientious can lead to better overall health and higher productivity. For traders, this is an endearing trait. 

Following trading rules, creating a trading plan or strategy and being disciplined are all components of conscientiousness. High scorers tend to have an easier time grasping trading. People who are not highly conscientious can learn. The use of checklists, To-do lists and systematic trading are all traits that we can nurture. Of all characteristics, this is the easiest to acquire. A few years of persistence and willpower can help you attain trading success. 

Neuroticism measures general sensitivity to negative emotions such as pain, sadness, irritable or defensive anger, fear and anxiety. People who score high on this trait have a hard time trading. They struggle due to the emotional nature of the game. If you score high on this trait, some activities like meditation and daily journaling can help. 

Understanding ourselves should help us form a trading system that fits us. For example, a high neurotic trader should be very keen on emotions and frustrations after losses. Understanding which areas of trading are likely to be challenging can help us perfect our trading. 

Trading well is a function of capitalizing on our strengths. A person who scores high on conscientiousness should be keen not to adhere to rules strictly without paying attention to shifting market dynamics. A shift in market conditions requires a change in our trading rules. 

How our personalities affect our trading 

Our trading results can act as a reflection of our personalities. There are several Indicators that we can use to understand our characters in the trading context. By reflecting on these results, we can develop rules and systems to keep us in check in our trading.

 

We shall look at some key indicators of our trading performance and explain what it means for our personalities. 

Frequency of Trade execution 

We can think of this manifestation of a trader’s need for stimulation and tendency toward sensation-seeking. The trader who needs/desires to be active in the marketplace is prone to over-trade. He may also do well as a short term trader since there are more setups in that trading style. 

Position Sizing Relative to Account Size 

This is a direct measure of risk-taking vs risk aversion. A balance of risk taking and risk mitigation is what defines a good trader. 

Money management is the Holy grail of trading. Understanding position sizing relative to our personalities is a strength that few traders can manage. 

Average Size of Losing Trades vs Winning Trades 

This measures the prudence or conscientiousness of the trader in managing risk. Traders with significant outliers among losing trades display a lack of control over risk. 

Number of Different Positions and Strategies Employed 

This is a measure of our creativity and cognitive strengths. We should be keen not to confuse intelligence with success in the markets. Many Intelligent people failed terribly in trading. 

We will sum up this lesson by encouraging traders to integrate their personalities into their trading. If we can develop ourselves to mastery, our trading will improve. Your personality affects your trading, but your trading also reflects your personality.