Matching a Trading Style to Your Personality

If there is one SINGLE factor which is extremely crucial in determining whether an individual would be successful in making money as a trader/investor, it mainly depends on one’s chosen method that is consistent with one’s own personality and within their comfort zone. Virtually every successful trader/investor that I am familiar with has ultimately ended up with a trading/investment style suited to his / her own personality.

I have learnt from my own experience and it is my firm belief and strong conviction that there is no trading system that comes ready-made, one size fits all. There are so many trading styles that successful traders have adopted and the first thing a prospective trader or a trader after a few years of trading should do is to conduct a self- personality assessment to find out the specific approach that one is comfortable with. This according to me is the single most important factor that separates winning traders from losing traders.

Each trader must select the right market (equities, commodities, currencies), choose between discretionary trading and system trading, fundamental or technical methods, duration of trading (intraday , swing, positional or spread trading), aggressive and conservative styles, and so on and so forth. For all of these diametrically opposite choices, one should make the right selection that matches his/her individual personality so as to avoid internal conflict which might prove to be disastrous. At the end it seems that majority of the traders would have done this homework beforehand but in reality rarely does one seriously select a method that is in sync with one’s own personality. In a general sense, it is remarkably common for traders to adopt methods entirely unsuited to their personalities.

Instead what I find in the market place is traders who are good at system development end up consistently interfering with their own systems and overriding it due to lack of discipline that might often lead to disastrous results. There are traders who buy stocks with an intraday horizon and end up keeping them in their long term portfolio due to incapability of booking losses. For them, a long term investment is a short term trade gone wrong. It is noticed that plenty of investors who are naturally inclined towards searching for potential long term ideas end up instead doing short term trading because of emotional weaknesses like impatience or a habitual compulsion to be in a hyperactive need of consistently doing something in the market. There are several naturally born floor traders or screen readers who have great intuitive skills but abandon their special talent while listening to the loud opinion of the market which always turn out to be wrong at a very critical juncture. At the extreme end, one will also find plenty of theoretically oriented traders who after a lot of hard work develop intricate, low-risk arbitrage strategies but instead of putting them into effective practice they decide to become positional trader which is an approach that requires a different degree of risk acceptance far beyond their comfort levels. It is not uncommon to find investors loaded with momentum stocks in spite of having an aversion to volatility. Also it is uncommon to find investors holding on to value stocks (bought on tips) when they have a natural inclination for instant gratification which momentum stocks provide.

In all the cases mentioned above, one thing which stands out very clear is that, traders/investors with a natural bent for one style of trading/investing end up using a diametrically opposite style, usually to fulfil some emotional need which unfortunately they are not even aware of. To put it rightly, the need to match personality and trading style may be a matter of simplicity and common sense but it is certainly not common.

One should be aware of the following observations about one’s own personality to find out the right approach that would suit him. If you can’t stand to give back significant paper profits, then you are totally

1.      Unsuited for a long-term trend following approach. Even the best long term trend following system will be a disaster because you will never be able to follow it.

2.      If you can’t stay away from the screen, then investment will never suit you. Instead you should be day trading.

3.      On the other hand if you don’t want to watch the quote monitor, forget about intraday trading.

4.      If you can’t stand the emotional strain of making trading decisions, then focus on a mechanical trading system.

5.      If you cannot handle the uncertainty of overnight newsflow, then you are suited only to be a daytrader.

In a nutshell, the approach you use must be right for you; you must be comfortable following it. The importance of this cannot be overemphasized. Incidentally, it is because of this singular reason of mismatch of trading style and personality that purchased trading systems rarely make profits for those who buy them, even if the system is a good one. The odds of getting a winning system may be reasonable but the odds of getting a system that fits your personality is very little. System traders cannot create a system that fits everyone’s personality.

How does one find a system that is in sync with his personality? Given below is a list of questions whose honest answers will help a trader/investor to select a system suited to his personality.

1. What is my greatest weakness as a trader/investor?
2. What is my greatest strength as a trader/investor?
3. What do I find most interesting about trading/investing?
4. What do I find least interesting about trading/investing?
5. Can I handle drawdowns?
6. Do I have the patience to sit on stocks?
7. How much effort (time and money) am I willing to commit to trading/investing?
8. Should I trade as per a mechanical system or a discretionary system?
9. Can I handle volatility?
10. What all should my ideal system contain?

As one introspects and carefully answers the above questions and evaluates, it should become clear to you exactly what you will need for your system to be successful. Knowing one’s personality type and the specific idiosyncrasies of one’s temperament is the piece that will round out the ultimate success of your trading puzzle.

D Prasad is a Chartered Accountant and is in stock market for the past 15 years both as an investor following fundamentals and also as a trader following technical analysis. He is very well read on the subjects of Trading Psychology and Behavioural Finance. He is a partner of Equity Strategists which is an Investment Advisory firm providing Daily Newsletter and SMS Advices to traders, investors and brokerage houses. He is a regular invitee on business channels like NDTV Profit, UTV Bloomberg, CNBC Awaaz, ET Now, Zee Business and TV5. He can be reached at dvprasad1965@gmail.com