|Real trading is hard. Real trading is stressful. Real trading is difficult, and it will physically drain you. One day, your emotions will soar as you watch your positions move in to profit; the next day, you will plumb the depths of despair as those paper profits vanish. |
So what makes you think you can succeed? The market is littered with the corpses of those who thought they could beat the market with the latest technical indicator that has worked for the last 10 years. Sadly, it failed in year 11, or when you tried it. Everyone's looking for the perfect system, the foolproof method, the quick solution, the get-rich-quick scheme. I have news for you — they don't exist.
So you think you can succeed in the toughest market of all? What makes you any different from anyone else?
The answer is very simple — it's you.
You are unique; there is nobody else like you in the world. Your genetic makeup is unique, your background and upbringing are unique. They have made you what you are today, warts and all. The values that you hold are those that have been instilled in you through your childhood. Your perspective on life has been molded and created by your parents, your teachers, your partner, your colleagues.
Your entire world is how you see it — not anybody else. Your idea of risk will be yours and yours alone. Your attitude to money will be unique to you. Some of you reading this article will think that $200 is not much to lose in a few minutes, while others will take an opposite view. In terms of your overall capital wealth, it may be a small sum. However, as a percentage of your trading capital, it could be significant. If it's 10% you would be out of the game in 10 trades. Less than 1%, you stay in the game longer and live to fight another day.
Undoubtedly, you will have strengths, but you will have weaknesses also. Understanding yourself as a person is the single most important factor in deciding whether you succeed or fail as a trader. If you do not understand yourself, you cannot succeed. Make no mistake about it; your personality has a major influence on how you trade. It is more important than the software you use, your broker, your system, or even what your partner thinks. In Market Wizards, Jack Schwager suggests that the single most important element of a successful trader is in having a trading plan that fits your personality. How can you write a trading plan if you don't know your personality? Oh — you probably don't have a trading plan either!
TAKE A TEST
So where do you start? If you are currently trading or thinking of trading, stop now and complete a trading personality profile. Plenty are available on the Internet, some for free. An excellent place to start is at the website of Brett Steenbarger, author of Psychology Of Trading and associate professor of psychiatry and behavioral sciences at Suny Upstate Medical University. Here, you will find a simple 15-question test with a scoring system and explanation of the results.
This is a very simple test that you can complete in a few minutes, but it will give you an overview of yourself and the facets of your personality. Further, you may want to consider taking a Myers Briggs test, the bare bones of which may be found on the Internet or in one of the many books on the subject, or even in the full-blown, professionally run test.
The Myers Briggs test contends that individuals fall into one of four pairs of behavior patterns:
· Extroverted or introverted
These behavior patterns combine to form the 16 basic personality types that will tend to dictate the natural preference for behavior in a given situation. There is no right or wrong type. The assessment is based on a series of questions that will indicate your particular behavior preference. This is money and time well spent.
After you take a test or two or fill out a profile, you'll have results that are most likely fairly close to the truth. At this point, you'll probably ignore the negative aspects and admire what you feel are the more positive ones. This is normal. Humans in general are optimists — why would everyone normally expect stocks to rise if this were not the case? Here's a tip — concentrate on the negative.
MAKE USE OF WHAT YOU ARE
Now you have a better idea of your personality and the attributes that make up your personality. You cannot refer to the attributes as strengths or weaknesses, since strength in one situation could be considered a weakness in another. How do you merge this with your trading? Simple, really — take for example the personalities of my wife and me as we trade together.
I am an introvert and loner by nature, disciplined, with great attention to detail. I like things well-ordered and prefer to work to a plan. My view of money is not to take unnecessary risk and to err on the cautious side when investing. I am normally calm and rational, except when under pressure when logic can be overtaken by emotion. When losses occur, I can take some time reflecting on them, but on the positive side I try to learn a lesson for the future.
My wife, on the other hand, is almost the exact opposite. Gregarious by nature and an extrovert, she is undisciplined and bored by detail. She will tend to trade by instinct, and for her, money is a means to an end. She is quite happy taking large risks, and if these do not work out, she writes the result off to experience, and moves on.
As a couple, we trade completely different instruments. My wife trades currency pairs. Trades are completed in minutes and hours rather than days or weeks. A typical trade might last for 10 to 15 minutes, an hour at most. Once the trade is complete, the profit or loss is taken, the position closed, and on to the next trade. The market is open 24 hours a day, so trading can be fitted in to other activities. There are only a few major currency pairs to trade, so research is limited to the major trends, economic announcements, and world events. She has a loose trading plan that defines money management and risk.
In contrast, I trade US equity options, using a combination of covered call and covered puts. Positions are generally open for days and weeks, but entry and exit points are clearly defined by stop-losses and expiry prices, so the trades are virtually mechanical. This removes virtually all emotion from the trades. I only check the screen two to three times a day in a seven-hour trading session. There is considerable research involved in finding company earning dates, checking volatility, sectors, volume, charts, and so on. I have a clearly defined trading plan that defines all aspect of the trades, along with money and capital management.
I hope you can see how we have selected the markets and instruments we trade to suit our personalities as closely as possible. We would not be able to swap — it simply would not work, and I would not swap her for the world!
Please spend some time discovering yourself — you might just get a surprise.
David and Anna Coulling can be reached at email@example.com if you would like details of their upcoming website, featuring a daily trading diary.
SUGGESTED WEBSITE READING
Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.