Trading Psychology: Personality and Trading Strategies

August 19, 2023

Have you ever wondered why someone you know is successful while you yourself are not? You might have the same tools, you might even be smarter and more emotionally intelligent than the other person. Consider that no two people have the same personality, nor are they wired the same. This successful person you are comparing yourself to might have a more aggressive personality than you, or they may be less sensitive to defeat than you are. Perhaps, the other individual continuously failed until they reached the successful “position” they are currently in. During this time of failure, this person that you are comparing yourself to may have learned through resiliency. Relentless failure may have acted as a guide for their current success. Comparing yourself to another person is a dangerous road to travel. Never feel incompetent related to another person’s successes. You must strive to understand yourself completely to help yourself to achieve. You are not defective because you lost money during a trade, or because you did not get the promotion at work, or due to a general setback in life. Everyone’s personality is unique. By completely understanding your personality, you gain the skills that will make you more successful.

There is no one-size fits all answer when it comes to trading styles. It must be recognized that some personalities are better suited for specific styles than others. Psychologically, personalities differ. Two people that undergo the same life event may cope with the aftermath of the event very differently. For example, imagine you had an event at school that was embarrassing, like you accidentally came to school wearing your shirt backwards and inside out. One student embraces it and says I meant to do it because I am having an upside-down kind of day. The other student is very embarrassed and when confronted by peers they in turn snap on them yelling about how it is none of the other students’ business. Now this individual has taken a non-event and turned it into an event that everyone is talking about. The person who didn’t want any attention about their mistake now has everyone talking about them. Let’s relate this scenario to trading. If one person loses money, they may be able to view it as a non-event knowing they will be able to recover from the mistake. Another person that makes the same mistake may get very angry, proceed to make vengeance trades, and in turn lose more money. To be a successful trader, you should know your personality. Like this, you can choose a trading strategy that suits you best. You must know your tolerance to stress and pressure, as well as, how you cope with different outcomes.

I have been trading for greater than 20 years. I was not always successful. I made a lot of mistakes. If I had my personality matched correctly to my trading strategy, I would have likely been much more successful early on. Truthfully, in my early years, I did not even know this was some thing that I needed to pay any consideration about. When I started trading, I was so intrigued by the fact that you can day trade and make money in the ebbs and flows of the constant fluctuation of the markets. I have always been a very active person. I also like doing things with my hands. For these reasons, the idea of rapidly selling stocks appealed to me. I was actively using my mind and my hands did not stop clicking- buy, sell, buy, sell. You get the idea. I was day trading without a great deal of thought or knowledge about the subject matter. I was also working a full-time job while making these trades. Needless to say, I was very distracted and interrupted frequently as I had to answer to pressing inquiries of my job real time. I made some bad trades, but at that time I attributed my failures to the fact that I did not have the minimum $25,000 to be a pattern day trader and to be permitted to make unlimited trades. After I raised the money to meet the day trading requirements, I was ready to make the next move and to become rich. However, this was not how it would go at this point in my life. If I understood my personality better, I may have been able to intervene earlier and to save myself a lot of money. However, I did not have a grasp of anything. I just kept going without understanding the components of trading. I was so sure of myself and my ability to make money that I ignored all the signs that were telling me to stop. I was getting angry at the market because it was not going my way. I was making rash decisions and not thinking things through. My personality is such that I need to be always in control. When things do not go my way, I get impatient and emotional. I also like to hurry up and meet my goals. Needless to say, my  goals were not being met. After losing a considerable amount of hard-earned money, I took a step back and assessed my situation. I realized that my personality was not a good combination for day trading. Overall, I identified that I am really not a patient person. This is something that is fundamentally built into me. Though not a good trait, this flaw makes me unique. If I wanted to continue to be a day trader, I needed to work with my personality. I thought I had a great trading strategy, but my impatience cost me a small fortune. Entries and exists were more of an emotional reaction as opposed to a planned strategy. No matter how tried and true your day trading strategy is, it will always be influenced by your personality style. Once I understood myself better, I was able to become a successful day trader.

There are different types of traders. You should understand which type of trader style you are so you can amend your trading strategy to make yourself as lucrative as possible.

The Analytical Trader

This trader is very methodical and takes the time to research and study the markets before making any trades. They like to have all the facts and data in front of them before making a decision. They are patient traders and typically do not make rash decisions. They study, research, and calculate to make the best possible choices knowing all possible outcomes and precisely what is at risk prior to entering.

The Aggressive Trader

This trader is always looking to make a profit and is not afraid to take risks. They are very active in the markets and like to make many trades throughout the day. They are trend followers and typically do very well when the market is moving a specific direction. These types of traders sometimes lose money as they are too active without placing a great deal of thought into each transaction.

The Confident Trader

This trader is very self-assured and believes that they can make money in any market condition. They are not afraid to take risks and are usually very successful traders. They believe that the decisions they are making are the correct decisions and have facts to back up their ideas. They typically gain their confidence from knowledge and previous experiences.

The Cautious Trader

This trader has an aversion to risk. They typically do not make many trades. They prefer to wait for the perfect trading opportunity before entering into a trade. They trade using a conservative style. The cautious trader also tends to be successful as they are patiently waiting for the right opportunity. They are typically in the green at the end of each day as they have planned their successes and would not even consider entering into a trade that would not be profitable. However, their weariness to enter the trade may limit their overall profit making ability as they may be missing out on many opportunities throughout a day.

The Patient Trader

This trader is the opposite of the aggressive trader. They wait for the perfect opportunity before entering a trade. They do not like to take risks and typically have a low tolerance threshold for high risk trades. These traders are similar to the cautious traders, but stand out as they are simply waiting for right timing- maybe waiting until after the earnings report to enter, the right value to enter- like waiting for the low of the month, or to hear the right news- to make sure the trade will go as they anticipate it will go. They do not need to do many trades, they just need to stay in the green.

The Trend Follower

This trader looks for the direction the markets are moving. They see the direction of the trend and ride the wave until the end. They typically use a lot of technical analysis of the charts and grids. By doing this, they can get out of a trade prior to the reversal of the market.

 

There are many different personality styles and each has their own advantages when it comes to trading. However, not every style is right for everyone. You need to find the style that works best for you and then stick with it. By understanding how your personality correlates to your day trading strategy, you can become a more successful trader.