Trading Personality

“If you get nothing else out of reading this book than the one following principle, it will still have been a very worthwhile endeavor: Successful traders find a methodology that fits their personality.” 

Jack Schwager, author of Market Wizards

“Traders must find a methodology that fits their own beliefs and talents. A sound methodology that is very successful for one trader can be a poor fit and a losing strategy for another trader."

Colm O’Shea

If you are a new trader, it may be a difficult task for you to choose your trading style, but it is absolutely a necessary step for your long term success as a trader. By choosing the trading style that best suits your personality, you will have a better chance of being a profitable trader. In this section, we shall look at the various trading styles and see whether you can find one style that suits you most.

According to Jack Schwager, author of Market Wizards, successful traders usually match one of the four types of trading with their personality type.

Scalping

Scalping is a very rapid trading style. Scalpers often make trades within just a few seconds of each other, and often in opposite directions (i.e. they are long one minute, but short the next). Scalping is best suited to active traders that can make immediate decisions and act on those decisions without hesitation. It is one of the most cognitive demanding forms of trading. Successful scalpers rely on intuition developed through years of experience along with a defined set of rules that are part of their overall system. This may be out of reach for traders who are just starting out. In addition, new traders who have more active personalities tend to overtrade their accounts. Even experienced active traders can fall into the overtrading trap as well. 

Day Trading

If you are one of those who get worried because of overnight positions then maybe day trading is for you. Like scalping, day trading also have no overnight positions, but it is the milder form of scalping. Day traders may take two or three trades a day and then liquidate all trading positions before the close of the day. A day trader does not subject his or her capital to overnight risk that can adversely affect a portfolio. 

While day trading requires skill, knowledge and discipline, it does not require the precision and high winning percentages to become profitable like scalping. They can usually locate trading opportunities that offer a minimum 1 to 2 risk to reward ratio. By only taking trades with a 1 to 2 risk to reward ratio, day traders only need to win 32% of the time to breakeven. Overtime, as the active personality skills develop, they may incorporate scalping as a natural next step.

By developing a solid day trading plan, active traders will have both a winning strategy that they can stick with because it matches their personality style which needs activity and variety. 

Swing Trading 

Swing trading strategy would ideally fit the analytical person as he aims to profit from both trend following moves and the subsequent corrections. Active personalities may find swing trading uncomfortable as they incline to make quick decisions, they cannot stick to a swing trading plan that may take weeks to unfold. They may feel restless and even begin to question the trade. As a result, they will find themselves taking profits or exiting a trade too early. Swing trading generally requires a larger stop loss than day trading, so the ability to keep calm when a trade is against you is a necessity.

Position Trading

Position trading is the longest term trading of all, and often has trades that last from weeks to months or even years. Therefore, position trading is only suitable for the most patient and least excitable traders. Position trading targets are often several thousand pips (for example, forex), so if your heart starts beating fast when a trade is 25 pips profit, position trading is probably not suitable for you. Position trading also requires the ability to ignore popular opinion because a single position trade will often hold through both bull and bear markets. For example, a long position trade may need to be held through an entire year when the general public is convinced that the economy is in a recession. If you are easily swayed by other people, then position trading is going to be difficult for you.

Being Faithful to your Trading Style

Choosing a trading style requires the flexibility to know when a trading style is not working for you, but also requires the consistency to stick with the right trading style even when it is not performing optimally. One of the biggest mistakes that new traders often make is to change trading styles (and trading systems) at the first sign of trouble. Constantly changing your trading style or trading system is a sure way to catch every losing streak. So often we hear that traders have to change their personality to fit trading. To some extent this can be done. However, if the changes are too far from a person’s core personality, failure is more likely. Personality should drive the choice of trading strategy rather not the other way round. Once you are comfortable with a particular trading style, remain faithful to it, and it will reward you for your loyalty in the long run.

Investors Vs Traders

Many people are lured into the world of trading because of the promise of “Quick Returns”! Yes, you can make money real fast, but you can lose your money real quick too!

Trading and investing are two very different ways of profiting from the financial markets.

Benjamin Graham defined investment clearly as: 

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

Investors

When you are investing, you are looking at a longer time horizon and you expect the assets to generate income for you repetitively. It could be rental yield from properties; interest from bonds or dividends from stocks. The goal of investing is to gradually build wealth overtime. Investors look for values in assets, they focus on the fundamental of assets, they analyze assets using fundamental analysis. Investors are willing to buy and hold an asset, with the understanding that asset prices fluctuate in short term, but over the long run, prices will recover and move in a steady uptrend.

Traders

When you are trading you tend to speculate on an asset, hoping to take advantage of the price difference for short term gains. While most traders speculate on commodities, index futures, forex and stocks for gains on small price movements, others do practice longer term position trades that aim at bigger price differences. It is widely believed that most traders use technical analysis for their trades, however, fundamental analysis is also commonly employed by traders to give them a sense of a macro picture for the assets that they are trading.

There are four types of traders:

Scalp traders – who hold positions in seconds and minutes, with no overnight position.
Day traders – who hold positions within one day.
Swing traders – who hold positions from days to weeks.
Position traders – who hold positions from weeks to months or even years.

I Am Both Investor and Trader

Most traders are also investors, although the reverse is not necessarily true. For example, I enjoy holding long term position in the equity market as most of the stocks that I am holding are dividend stocks that give me fantastic returns annually. At the same time, I also trade in the derivative market to take advantage of certain “obvious trends” such as a double top or double bottom chart patterns. 

Hence, we can say that both types of investing styles can actually complement each other and add value to your overall portfolio.

Whether you consider yourself a trader or an investor, make sure that you learn well how to make good entries and exits. Discipline is very important to trading. Very often we failed because we procrastinate in cutting losses .

Investor or trader – which is better? Whichever fits your personality, risk tolerance and lifestyle. Do not let anyone tell you that you should be one or the other. Examine yourself, and do what lets you sleep well every night.