How to gain a trading edge by knowing yourself is crucial for success in trading. In previous articles, I have written about how to find trading edges in the markets, but in this article, I look at how you can gain a trading edge by knowing yourself.
As a trader, you can gain a trading edge in the markets by knowing yourself well. You need to develop trading strategies that you are comfortable with and not copy someone else’s strategies. Moreover, how can you understand the markets if you don’t understand yourself?
Knowing yourself as a trader means you trade better
If you want to do well in day trading you have a big advantage the better you know yourself. That is one of the main trading lessons I have learned over 20 years of trading.
Otherwise, it could cost you dearly. You must know your weaknesses and strengths. This may sound obvious but after trading for many years I know this all too well.
But with experience, I am more aware of my weaknesses and adjust my trading accordingly. It sounds easy, but is still so difficult!
Introversion vs. extroversion in trading
I have many trading books on my bookshelf, and over the weekend I had a look at David Cohens Fear, Greed and Panic – The Psychology of The Market.
It’s not a particularly good book, but he has written some interesting pages about extraversion and introversion. These two definitions are used to define what kind of personality persons are.
If you want to succeed at day trading I think it is quite important to know if you tend to be an extrovert or introvert. Of course, people are not total extroverts or introverts. They score somewhere along the continuum.
Put shortly, extroverts get bored easily and they need constant stimulation. They are social, mentally “aggressive”/competitive, like going to parties, and are more willing to take risks than introverts (precisely because risks keep them stimulated). Usually, they are very optimistic.
At the other end of the scale, we have introverts who are meticulous, anxious, interested in details, and eager to get things right. They are not very social, they like working alone. Quite many are nervous about making mistakes. When they get things wrong, they tend to blame themselves and they generally want to make sure it will not happen again. This attention to detail is obviously useful in analyzing data. However, introverts often have a personality style that finds it hard to trade, especially the execution part. Why? Because they are risk-averse.
Obviously, a good trader would have the best assets of both these personality types. It would be perfect to have the introvert’s respect for details and the extroverts’ taste for risk!
Unfortunately, that is an unrealistic dream and one has to adapt to trading based on who you are here and now. If you know in which category you belong it can help you in trading. Then it is easier to find out what kind of strategies you can trade and what kind of leverage.
You need to know your risk tolerance in real trading before you implement strategies. Otherwise, it will be very hard to bring strategies from the drawing board and execute them in the marketplace.
Are introverts better traders than extroverts?
As for myself, I am definitely an introvert. I am unsure at which level, but no doubt I am in this category.
I am not particularly social, dislike small talk, find it exhausting to be around people absolutely all day long (except wife and kid), feel a relief I have no customers to talk to and have very few meetings, soft-spoken, interested in details, meticulous, risk-averse, tend to be more pessimistic than optimistic and like working on my own projects. I like quiet time and reflection. No commuting as well.
Yes, I can work well with other people, I have done that in the past, but I simply enjoy working on my own much better. Being a daytrader suits me just perfectly (except for one thing – execution).
When it comes to trading, I think I am good at analyzing, but quite poor at executing my strategies. Why? Because I am risk-averse.
I always doubt my strategies and believe they are useless just after a couple of weeks of grinding. In the good years from 2007 to 2009, I could have made a lot more than I did but my risk aversion kept me trading smaller than I should. The day trading environment was perfect: a lot of prey and liquidations from big institutions.
From my standpoint, an introvert will always be a better trader than an extrovert simply because introverts have more and better traits that are better suited for day trading than extroverts.
I would have loved to be more optimistic and cheerful, that would have made me more money given I could keep my other introvert attributes, but then again I probably would have taken much more unnecessary risk. You cannot cherry-pick your personality! In day trading you need leverage and that is a lethal mix with risk-taking. It is better to rise slowly and gradually than to rise fast and furious. Easy come easy go.
Execution is difficult for introverts
Before the open every day, I always think about how much money I can lose. After a good day of trading, I always kick myself for not trading bigger size. Honestly, after having traded for almost 2600 days I have had perhaps 30 days where I have been really pleased.
There are so many who writes about how positive thinking will lead to good results. To me, this is all bullshit. The markets have no feelings and do not care if you are an optimist or a pessimist.
All my analysis is done in a rational way, but my execution part is always troublesome. This is the tricky part of being an introvert! So I am seriously thinking to have my wife executing my strategies. I will do a lot better if done this way.
It is like a rally: I can read the map and my wife does the driving on my instructions. No second-guessing and panicking. Just execution. Some readers who are not trading might find this strange, but I am quite confident many traders feel the same as me. Why? I do believe most survival traders are introverts.
Being bored is good
The daytraders I know tend to be introverts more than extroverts. Daytrading means responsibility for your own decisions, being meticulous, analyzing, and working on your own. Daytrading can at times be very, very boring and routine (later I will describe my typical trading day – probably a big yawn for real extroverts), and extroverts might seek more stimulation than they should.
Sometimes day trading is just a waiting game. The best trades are often the ones you do not trade.
David Cohen illustrates the latter point with experiments on rats:
As long as the rats sometimes get a reward, for example sugar, they will go on pressing levers thousands of times. A rat might get only two or three rewards in a hundred presses but this intermittent reward schedule would keep them pressuring for days.
Intermittently rewarded rats were endlessly persistent and day trading creates just such a pattern of reinforcement.
If you consider yourself an extrovert, day trading may lead you into overtrading. A typical extrovert would always be optimistic after a good day. After a good day, he increases the size and counts all the money he will make. The next day he loses it all and more because of the increased size until he finally has a good day again with lower size.
He is caught in the ever-changing cycles and trading simply too much.
Conclusion: Knowing yourself as a trader
Knowing yourself as a trader is important in trading. A good starting point for any trader is to be honest to yourself and spend some time thinking about what kind of personality traits you have. Are you a risk taker? Are you conservative and afraid of losing? Do you like action? Do you follow rules? Are you good with numbers?
As you will discover when you put real money on the line, you pretty soon discover how you react under stress. Nothing is as easy it seems on paper!