Last Updated on March 30, 2021 by Oddmund Groette
Brett Steenbarger is a famous trading psychologist who has written the bestseller The Psychology Of Trading. In the book, Steenbarger referred to personality traits that tend to distinguish good from bad traders.
In Appendix D of Michael Covel’s Trend Following Steenbarger asks 12 questions that test if you can become a good trend-following trader. Because trend-following is strictly rule-based, we think it’s safe to assume the same conclusions from the test below apply to quantitative traders. In this article, we list those very same 12 questions.
What is a quant trader?
A quant automates the entire process of trading. The systems have answers for all decisions that need to be made when running a strategy live. There is no second-guessing, except perhaps when to stop using the system, for whatever reason.
If you have a system that has been both backtested and run live with an out-of-sample test, you gain faith in the system. Thus, it’s much easier to take all the signals the system generates. As long as a system is profitable, trading is a walk in the park. It’s when the inevitable losses and drawdowns happen when most traders lose faith and abandon the system – often at the worst possible time. The confidence, discipline, and consistency offered by a complete mechanical trading system are often the key to many struggling traders.
Personality traits of successful traders:
Be honest to yourself and answer yes or no to these 12 questions:
1. When something goes against you in the market, do you often find yourself venting your frustration?
2. Do you enjoy (or as a child did you enjoy) roller coasters or other thrill rides?
3. Do you often find yourself procrastinating over work?
4. Do you consider yourself moody – sometimes rather up, sometimes rather down?
5. Would you generally prefer going out and partying with friends rather than staying at home with a good book or movie?
6. Do you often find yourself apologizing to others because you forgot to do something you were supposed to do?
7. Are you generally high-strung, tense, or stressed?
8. If given the choice at a buffet, would you prefer to try exotic foods you’ve never heard of rather than familiar dishes?
9. When you have a task that needs to be done around the house, do you tend to take a quick and dirty approach, rather than a meticulous, painstaking approach?
10. After a losing trade, do you often feel guilty or get down on yourself?
11. Have you experimented with or regularly used two or more recreational drugs (other than alcohol) in your life?
12. Are you often late for appointments or for social plans you’ve made?
What kind of trader are you?
If you answer yes to most or all of questions 1, 4, 7, and 10, you can be labeled a “neurotic”. These tend to have anger, anxiety, and depression.
If you responded yes to most or all of questions 2, 5, 8, and 11, you score high on “openness and experience”. Thus, you are prone to risk-taking and sensation.
If you indicated yes to most or all of questions 3, 6, 9, and 12, you score low on “conscientiousness”, which measures the degree of duty, responsibility, and dependability.
Steenberger argues the ideal personality pattern for a trend-follower (rule-based quantitative trader) is one of low neuroticism, low openness, and high conscientiousness. He or she will stick to rules and systems (conscientious), won’t trade impulsively and on emotions (neuroticism), and will trade for profits, not stimulation (openness).
In my experience, some of the best system traders are among the least flashy people. They are meticulous and conscientious about their research and execution, and they don’t let their emotions or needs pull them from their discipline.
Conversely, individuals who are high risk-takers and who crave novelty, stimulation, and action often take impulsive and imprudent risks. Very frequently, the neurotic emotions kick in after a series of losing high-risk trades. Such individuals are trading for excitement and self-validation, not just profits. Even if they are given a tested, profitable trading system, they will not be able to follow it faithfully.
Is Steenberger’s test to be trusted? I scored high on neuroticism but have been a pretty decent system trader all my life. But at the same time, I’m pretty sure it has limited my gains over the years. I’m too risk-averse.
How to trade well
Steenberger ends the Appendix be these remarks:
Sometimes traders I talk with try to impress me by explaining that trading is their entire life. They do not realize that their very “passion” and “obsession” with the markets are likely to sabotage them, imposing undue pressures and interference. If you have trading system and you faithfully execute that system, trading should be reasonably boring and routine. Better to enjoy roller coasters outside of market hours than ride them with your equity curve!