Friday, January 16, 2015

Personality Style & Trading Decisions

The 'self-image' is the key to human personality and human behavior.
Change the self image and you change the personality and the behavior.
Maxwell Maltz

Part of developing a mental edge is becoming aware of your personality and working with it, or around it, not trying to change it. Personality traits are people's tendencies to behave consistently across time and across situations. It is useful to identify key traits in your personality and be aware of how they may influence your trading decisions. 

There are many characteristics that can be used to describe people's personality: friendly; creative; or argumentative, are examples. When it comes to determining your own personality style that it's most often not a "black and white" issue; there are many shades of gray. Some people are friendly all the time, other people are unfriendly all of the time, but most are friendly some of the time, but not at other times. For some their everyday personality bleeds over into their trading life, however for some their trading personality is distinct from their everyday personality. We as traders need to decide just how much of our personality will impact our trading. 

Some personality traits are especially pertinent to the profession of trading. Some traders are intuitive while others are more concrete and analytical. Many traders are risk averse, while others are impulsive and seek out risk. Each style has its advantages and limitations. Know which style describes you, and how accurately it describes you. Your inherent personality style may influence your trading decisions. 

Three popular trading personality types are intuitive, data oriented, and impulsive. The data-oriented trader focuses on concrete evidence and is often very risk averse. They seek out as much supporting data for a trading decision as possible. The trader who prefers to do extensive back-testing of a trading idea exemplifies data-oriented type. Consider incorporating elements of data oriented trader personality into your trading style regardless of your natural inclinations. It's vital to make sure that you have adequate information (a reason) before executing a trade. Particularly important is to have and trade a detailed trading plan in which risk is minimized and entry and exit strategies are clearly specified. Most often however, the data-oriented trader may take things a little too far. Searching for "the perfect" knowledge that just doesn't exit in the trading world. At some point, one must accept the fact that he or she is taking a chance and no amount of data analysis can change this fact. 

The intuitive trader is the opposite of the data-oriented trader. Trading decisions are based upon hunches and impressions rather than on clearly defined data. There's a difference between being an intuitive trader who develops this style over time and one who is naturally intuitive. The experienced intuitive trader, bases decisions on data and specific market information. But, as a seasoned trader, analyzes the data quickly and efficiently. It happens so quickly that it seems like it occurs intuitively, but it is actually based on solid information. Ideally, all traders should gain extensive experience to the point where sound decisions are made with an intuitive feel. 

A third trader personality type is the impulsive trader (gambler). This is the most dangerous style. The impulsive trader allows his or her decisions to adversely influence trading decisions. Rather than looking at information logically and analytically, information is discounted completely. The impulsive trader seeks out risk and enjoys taking risky, exciting trades. Impulsive traders can often make huge profits one day and see large draw downs the next. Your personality can have a huge influence on your trading performance. Identify your assets and liabilities, and work around your personality when it is necessary.

Taken from PrudentTrader Archives 2005

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