Saturday, March 21, 2015

Overcoming weaknesses of trading personalities

I had studied the mind set of successful traders before. Recently, I've been reading a book named "Proven strategies for generating greater profits from the award-winning team at maverick trading" by Darren Fischer, et. al. This book covers a broad range of trading topics in about 300 pages, and gives an excellent introduction on how to become a professional trader.

Here, I'd like to focus my study on one of the chapters regarding how to overcome weaknesses of a trader's personality. In order to identify a trader's strength and weakness, the book presents a series of questions in the following 4 aspects to categorize trader's personality, depending on the answers of the reader:

  • How does the energy come from: Introversion or Extroversion
  • How are decisions made: Intuition or sensation
  • What kind of attention is used: Thinker or feeler
  • What kind of lifestyle of a trader: Judging or perceiving

As an example, the trader with the following set of personality has specific strength and weakness as shown in the table below.

Informed decisions; thorough in analysis
Analysis paralysis; less comfortable trading with a team
Good chart reader; look for relationships
Deviate from rules; overuse indicators to support biases
In tune with market; understand big picture; trade with good accuracy
Stick to losing trades; emotional; too many bearish trades
Decisive; self-starter; take action quickly; good risk management skills
Susceptible to noises; not taking advises

The book gives some other insights beyond the typical baseline solution of imposing trading discipline: create specific trading rules and environments so that the weaknesses have minimal chances to show up in the trading process. This methodology, rather than trying to correct the weakness, should help to overcome the weaknesses since trader's personality is likely to remain over a long time in the trading career.

It's stated that the root cause of all weakness is the fear and greed. The only way to remove this element completely is not to care about profit and loss. Trade the amount that is totally comfortable for you if you face maximum loss. Personally, I think we can also avoid looking at the P&L all the time, by not showing the P&L in the trading software windows during trading battles.

For intuitive decision makers who like to look for evidence to support some trading biases, this type of traders needs to simplify the indicators to just one or two. For feelers whose trading action may be clouded by emotions, they need to calm down or look for the trades opposite to the extreme mood. For the judging traders, they may get out of trades too early due to market fluctuations. So they may trade a basket of positions so that the overall portfolio does not produce extreme losses.

I don't think there are any recommendations about how to tackle the shortcomings of introversion in the book. Personally, I think the establishment of simple but specific rules would help minimize the analysis paralysis. Actively participating group discussions should also make it more comfortable for taking advises.

Overall, this book of "Professional techniques to create generational wealth" provides an extensive range of topics on trading successfully as a professional trader. If a trader would like to deep dive into any one of the individual topics, he can find other books on each specific topic with similar length.

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