Quite a bit has been written on trading psychology and common behavioral traps, but the personalities of the actual traders remains a relatively unexplored field. Not everyone is cut out to be a trader, and some people will simply do better than others. Furthermore, different people trade in very different, even diametrically opposing, ways. In this article, we will take a look at some elements of trader personalities and how this impacts their success in the market.
The Basic Principle
Human variation means that, given the choice, people will gravitate automatically towards activities and professions that suit their personality and behavioral patterns. Ideally, this will lead to both success and satisfaction.
Conversely, if people are forced (or just drift) into a line of work that conflicts with their preferences and talents, things are likely to go wrong. A classic general example is someone who longs to be a dancer or an actor, but whose parents force him or her to take over the family business. This is not a recipe for managerial bliss and a thriving concern. The same theory applies to traders.
The Implications of Personality Types for Trading
It is inherent in the nature of trading that people cannot avoid all aspects of the job for which their personalities are unsuitable. Certain unavoidable patterns of behavior will, therefore, lead some traders in the right direction, while others are doomed to failure. Let us look at this in terms of two extreme trader personality types, the doers and the thinkers. These are fundamentally different types of people, and their inherent personality traits are equally vital for what happens when they trade - or try to.
Doers: Restless and Driven
Doers are people who are at peace with themselves only when they can act and move fast. The quality of reaction is secondary to its decisiveness and speed. Doers tend to think quickly, irrespective of whether they really have to and often without thinking through all the relevant factors. They are impatient, restless people who hate doing nothing or being passive. Many are workaholics who feel constantly driven.
Such behavior tends to lead to mistakes, but the doers then try to correct them with equal speed. If things go wrong and money is lost, the doer will tend to try and win it back immediately, which may lead to reckless behavior and total disaster.
Thinkers: Cautious and Wary
Thinkers, by contrast, act only after thinking things through very carefully. They like to take their time and figure out all the angles. For them, the quality of the decision is what matters. Thinkers make fewer mistakes than doers, but then, they do less altogether.
A classic example is a university professor who beavers away at research projects, only submitting them for publication when they are absolutely sound and correct. The end result is often quality rather than quantity. But in the world of money, the situation is different. Excessive caution may lower the quantity of money earned.
In the Realms of Trading
Let's assume that two traders perform a transaction, one a perfect doer and the other a perfect thinker, and see how they perform. In purely theoretical terms, both will likely fail horribly. The doer will inevitably overtrade, be too risk-friendly and incur huge losses, whereas the thinker will freeze up before long and do nothing. In other words, the doer tends to be too speculative and the thinker too conservative.
The doer will act right away, given that he or she is always on the lookout for action. Even if the doer makes a profit, he or she may still leave the trade open too long until it goes sour. Also, because any market moves in waves or cycles, eventually, with some future transaction, the doer will blunder in this strict theoretical sense. He or she will keep betting against the market and, as soon as things start to go wrong, become progressively more risk-friendly until all is lost.
The thinker, by contrast, finds it difficult to get going at all; it is easier for him or her to just not trade. The thinker may never get going, and if they do, one loss will chase him or her away, probably forever. And if the thinker makes a profit right away, he or she is likely either to let it run till the market turns against him, or sell out too early.
The essential problem is that the doer does too much and the thinker too little. Extremes are dangerous in the business of trading.
The Happy Medium
Given that neither extreme is satisfactory, it is clear that both doers and thinkers have to control themselves, so as to avoid either doing too much and thinking too little, or the converse. In reality, most people have a bit of both extremes in them, but tend more towards one pole or the other. Both types of trader have to shift over into a kind of happy medium, into an optimum. It is necessary for traders to have or develop sufficient self-insight to know when their personality traits are getting the better of them and in the way of good business, and to hold back and do what is coldly rational under the circumstances.
The Comfort Zone
All individuals have a comfort zone that protects them from fear and pain. By definition, however, no learning occurs within the comfort zone! It is only when the situation forces the trader out of this zone that he will learn, generally from mistakes. For instance, if excessive caution has prevented a lucrative trade from being undertaken, next time the trader must "just do it" and take the plunge, despite emotions of fear and apprehension. This is assuming that these emotions are simply inherent to the trader's personality and not justified in terms of the market. Very few people are such natural traders that they can just go out there and score on an ongoing basis. In most cases, they lean too far one way or the other, and they need to learn what works – both for them and the markets in which they operate.
Learning from Trading
Trading frequently occurs beyond the comfort zone. Both doers and thinkers who survive long enough to learn how to cope effectively with such discomfort, generally move from strength to strength. The others fall by the wayside. Traders who are unable to adapt their personality and behavioral patterns to the realities of the market and of other traders will not succeed.
The Bottom Line
Trading is very much a human activity, entailing intense, often stressful incidents in which a lot of money can be made or lost. This is not something for everyone, not even for those who are truly motivated to succeed. Personalities are in fact quite stable, and traders need to work on them, so that they develop an optimal balance between their intrinsic natures and the combination of attributes that works out there in the market.