LONG ANSWER
Am I really cut out to do this?
If you’re struggling to achieve consistent profitability, self doubt will stalk your every move. It undermines your confidence and can be very stressful – especially if you have other commitments - e.g. family or work. Sooner or later, you’ll question whether or not you’re really cut out to be a trader. Fear not, this is normal. Only a tiny minority of traders take to this business like a duck to water and make money consistently from the get go. With these nagging doubts about your own ability, it’s common to question whether traders are born or made. Unfortunately, there’s no definitive black and white answer to this question. Like pretty much everything else in trading, it’s down to personal opinion. If you conclude that trading aptitude is a god given gift, you’ll want to find this out as soon as possible – along with whether or not you’re one of the ones who have been blessed. And if you haven’t, you’ll want to quit sooner rather than later, so as not to waste any more time and money. Quitting may well be the best option. The old cliché ‘winners never quit and quitters never win’ is totally inappropriate to trading. This is because virtually all successful traders have the ability to admit they are wrong when the market goes against them and to get out – fast. Losses are inevitable; but ensuring they are kept small is essential. It sounds simple enough, but the tricky bit is sticking to it like poop to a blanket, trade after trade, day after day, week after week etc. You must be consistent in your actions and this is underpinned by self discipline. This is the No.1 trait which many traders regard as being critical for success. One ill-disciplined action – such as hanging on to a losing trade (or, heaven forbid, adding to it) could prove to be disastrous. Murphy’s Law dictates that the one time that you do it - will be the time you blow up your account.
Matching what you’ve got with what you need
As was outlined in the Short Answer, knowing that successful traders are born or made isn’t much help to you. Either way, you need to establish whether or not you’ve got what it takes, or can develop the necessary personality traits to be successful. Please note – for the most part, we are not talking about skills here. Skills are acquired through learning and practice. Personality traits tend to be properties that you’re born with. Good ones can be enhanced and bad ones can be controlled. All of us have both good and bad personality traits for trading that have the potential to propel us to dizzying heights of success or, alternatively, cause us to crash and burn. The trick is to identify those required to be successful and then to see how many of them you have. It’s a bit like playing a game of snap. Many personality traits have a by-product or another characteristic associated with them which, in turn, may or may not be helpful to your trading. For example, a searing intellect combined with a passion for mathematics and technology could land you a top job at a major investment bank as a quantitative analyst, earning a spectacular 6 figure salary. But, big brains can be accompanied by an ego to match, and there’s nothing the markets like more than a trader with a giant sized ego! It’s not uncommon for people who are well educated and high achievers in professions such as law and medicine to think that they can replicate their success as traders. Some of them can, but many of them can’t - and some of them take a beating. If you’re to survive as a trader - let alone prosper in the medium to long term - humility is an essential characteristic. If you’ve got a big ego (that you can’t keep in check when you need to) and you hate being wrong about anything – then trading may not be for you.
Trading plans – part I
Many traders will say that having a well crafted trading plan will help to minimise (if not eradicate) many issues that might otherwise lead to disaster. Here’s an example. Suppose you’re an ex-fighter pilot who is accustomed to working in a highly disciplined environment and sticking rigidly to very strict procedures. As a trader, this is a massive plus. However, the flip side of the coin is that you may have a lust for fast paced adrenaline pumping action or, even, a subconscious desire to experience fear. This isn’t so good! You may be inclined to take trades that you’ve no business to be in, add to losing trades or to punt your whole wad on one trade. Your trading plan can counter all these tendencies by stipulating precise trade set ups and entry triggers, never adding to losing trades and restricting the risk per trade to X% of your account. However, if you’re a discretionary trader, you’ll still have to exercise self discipline in sticking to your plan. If you can’t do that, then you should consider a mechanical approach that requires little or no manual input from you – or to quit trading. (If you’re unfamiliar with the terms ‘discretionary’ and ‘mechanical’ in a trading context, check out this FAQ:
What’s the Difference Between a Discretionary Strategy & a Mechanical System?) Some traders who suffer from this problem fund a small ‘play’ account to gamble with, so their need for fun and excitement is fulfilled, without jeopardising their primary trading account.
Trading plans – part II
In some respects, trading is a bit like driving in that we have predetermined actions for every event that occurs in our journey. For example, we know that we’ll stop at the T junction at the end of the road, indicate, look in all directions and only pull out when it’s safe to do so. As drivers, we all have the same rigid plan as to how we will behave and what we will do in all conceivable situations. We all take a test to prove that we not only understand the plan, but that we can also apply it in real time whilst driving. Our trading plan needs to be equally well thought out and executed. If we don’t do this and ignore our own rules, the impact on our equity is likely to be as serious as the impact on our car (and possibly our health) if we ignore the rules laid down in the Highway Code. A well crafted trading plan will help to maximise our positive traits, while helping to ensure that any damage caused by our negative traits is kept to a bare minimum.
10 personality traits essential for trading success
Listed below are 10 key personality traits that are common to most successful traders. Each one ends in a question which you need to ask yourself in order to determine your natural trading aptitude (nature), and the areas you need to work on (nurture). If you paper trade – or trade a very small live account – you’ll soon discover the areas in which you perform well and those in which you perform badly. You can change and develop the traits required for trading and control the dangerous ones that hinder it. It’s not a case of asking a leopard to change its spots. For example, suppose you’re naturally lazy and ill-disciplined. Unless you address this, failure as a trader is virtually guaranteed. However, the capacity for hard work and self discipline can be acquired and learned – just ask anyone who has served in the armed forces. This is just as well, because top of the list of essential traits is . . .
1. Hard work and self discipline
Why do you want to trade? Is it just for laughs? If so, that’s not a problem so long as you’re aware that you’re unlikely to do well in the medium to long term and will probably blow up your account at some point. Many trading wannabes don’t want to be traders at all. They want an easy life with loads of money in return for very little work. If this describes you: wake up! It’s not going to happen. There’s no holy grail, no getting rich quick. Success is a by-product of hard work. If you’re fundamentally lazy and you aren’t prepared to put in the hours required to be successful – then you won’t be. The bed fellow of hard work is self discipline. Having a meticulously laid out trading plan is a complete waste of time if you don’t have the self discipline required to follow it. Look at other areas of your life and see how disciplined you are. E.g., if you’re watching your weight and you’ve promised yourself you’d only have one double choc chip cookie each day – are you sticking to it?
Q. Are you able to remain totally focused, work hard and trade with robotic discipline day in, day out, week after week?
2. Keeping Your Emotions in Check
If you’re a discretionary trader, it’s vital that you make trades for rational reasons and not gut instinct. It’s easy to confuse the two. If you look at your past trades and you can’t pinpoint the precise reasons for taking them then, almost certainly, they were ‘shoot from the hip’ gut instinct type trades (aka gambling). The market enticed you to trade emotively through fear and greed, rather than calmly and rationally according to a predefined trading plan. Chances are, you’ve done this AND made money; it’s very common amongst new traders. Unfortunately, it’s a dangerous habit to get into and one that’s often tough to break. Good traders do not allow their emotions to be manipulated by the market and always trade according to some kind of plan. In the long run, if you let your emotions dictate your trading decisions - you will lose your money – guaranteed.
Q. Are you able to park your emotions while trading to ensure all your decisions are made calmly, rationally and objectively?
3. Beware of Opinion – Especially Your Own
Good traders not only exclude their emotions when trading, but their opinions as well. There’s a pro’ day trader of U.S. equities and long standing member of T2W called ‘Mr. Charts’ who frequently imparts this advice:
“I ignore opinions about the markets, including my own. Of course I’ve got an opinion, but I don’t take any notice of it. I trade what actually happens, not what I think should happen. The market doesn’t care what people think or expect, it does what it does under the pressure of supply and demand”. This is a difficult and counter-intuitive trait to master. Throughout much of 2009, the markets soared and every technical and fundamental indicator suggested it looked overcooked. Day after day traders closed their longs and/or initiated short positions, based on their opinion that the market would reverse, or at least retrace some of its gains. They let their opinion dictate their trades, rather than rational analysis of what the market was actually doing.
Q. The ability to enter and exit the markets must be the result of crystal clear thought processes - and not muddied by personal opinion. Do you think you can distinguish between the two? (The acid test will be when the objective facts indicate a trade to the long side, even though in your opinion the market is about to fall.)
4. Ego & Humility
The market is always right. It is in control, not you. Good traders know this and accept it. The downfall of many traders comes when they believe they have a handle on the market and they think they know what it will do next. If you are trading for the satisfaction of being proved right, then be afraid, be very afraid. You might be a super trader in all other respects but, if your ego gets the better of you, likely as not you’ll blow up eventually. The human ego is to traders what Kryptonite is to Superman. You need to have some sort of a dead man’s handle that is tripped the minute your ego gets the upper hand and controls your trading decisions. This could be discretionary as part of your trading plan. Alternatively, some brokers offer a facility that will limit the number of contracts or shares etc. you can trade. Also, they can set a maximum drawdown on your account within a specified time period – e.g. in one day. Not perfect, but it should stop you from a having a dramatic blow up.
Q. In part, this FAQ is designed to give you the self belief and confidence required to carry on in your pursuit of making consistent profits. The flip side of this is the tendency for this to spill over into arrogance. Generally speaking, are you a very self-confident person prone to arrogance and, if so, are you able to cap it when you need to?
5. Patience
You simply can’t expect to go from a standing start or from a position of losing money to making money, consistently, overnight. The methodology you learn may be a simple one which only takes an afternoon to digest. However, that doesn’t mean it’s a piece of cake to apply in a live market with real money. On the contrary, a simple methodology and live trading are two completely different things. You must acquire experience which will take time and practice. Additionally, you will still need an abundance of patience – especially if you’re a day trader. A hallmark of many successful (day) traders is the ability to stay out of the market at certain times and do nothing. This is counter-intuitive in a culture where the work ethic dominates and hard work is synonymous with action. Inaction is akin to laziness. Not so with traders. The ability to sit on your hands and resist the temptation to take trades that you have no business to be in is a very important trait to master.
Q. Are you a patient person or are you like that child that wants an ice cream and wants it NOW! Can you resist the temptation to trade and watch patiently from the sidelines until the ideal opportunity arises?
6. Being honest
You must be honest with the most important person of all: yourself. Self deception is rife amongst traders. ‘I
would have taken that trade if . . .’, ‘I
could have taken that trade but . . .’ or ‘I
should have taken that trade, but I didn’t because . . .’ Woulda, coulda, shoulda are three words you are well advised to try to delete from your vocabulary. Self deception is especially common when paper trading, which is why some traders don’t like it. ‘With my live account I
would have let my profit run and not exited so soon.’ ‘With my live account I
wouldn’t have taken that (losing) trade.’ ‘With my live account I
wouldn’t have moved my stop loss and risked my entire account on just one trade.’ Yeah right, of course you wouldn’t!
Q. Take a good look in the mirror – can you be brutally honest with yourself? If you can’t, it’s likely that you’re always going to struggle to make it as a trader.
7. Self-evaluate
Coupled with being honest with yourself is the ability to self-evaluate your performance, make changes as required and then implement them. Let’s return to the example of someone with a sweet tooth who’s watching their weight. First of all they have to be honest with themselves and acknowledge there’s a problem: they’re overweight. Then they have to decide what action to take: cut down on the intake of double choc chip cookies. Then they have to exercise the self discipline required to say no and keep their hands out of the biscuit tin. Then they have to monitor their performance to see if they lose weight at the rate they want and by the required amount. If they don’t – then why not? More critical self examination is required. If they are, they can congratulate themselves but mustn’t get complacent as they need to maintain their regime to continue to get consistently good results in the future. Rinse and repeat.
Q. Can you self-evaluate your performance; distinguish what you’re doing right from what you’re doing wrong? Can you then make the necessary adjustments and implement them? (NB: how to do this is expanded upon in the Trading Plan Template – see Useful Links in post #3.)
8. Being consistent
The beauty about computers is that they are consistent. Program them to do something and they do it without hesitation or deviation. Humans aren’t very good at this. It’s almost certainly a trait you’ll have to work on in order to excel at it. There’s no point in doing it right one day if you can’t repeat your performance the next day. You’ll just tread water; commissions will gnaw away at your account and you’ll die a slow death by a thousand cuts. You’ve got to be like an actor in a long running west end play, performing the same role twice a day for months. As with actors, lots of things will impact your daily performance and stop you from trading consistently. E.g., feeling under the weather, not sleeping well, having a night out on the town, family distractions and work commitments etc. All of these need to be factored into your trading to ensure that you perform to a consistently high standard day after day. It’s part of being professional. If a surgeon has a bad day, the patient might die. If you have a bad day, you might blow up your account.
Q. Trading can be dull and repetitive at times. Do you have – or can you develop - the ability to perform the same or similar actions over and over to the same high standard day after day?
9. Application (can you pull the trigger?)
Some people know all there is to know about trading and can talk the talk, but they’re simply not cut out to walk the walk and trade a live account. In their heads, millions of football fans can play the perfect game and have an encyclopaedic knowledge of the sport. Unfortunately, on the field of play, they’re hopeless. There’s only one way to find out if you can pull the trigger – and that’s to put real money at risk. When you start, make sure it’s a very small sum so that if it all goes pear shaped, the damage to your finances is kept to an absolute minimum. If trading reduces you to a quivering wreck, you can adjust your style to adopt a more relaxed approach (i.e. longer term), move from a discretionary approach to a mechanical one - or quit. Having a well thought out trading plan will be very helpful in this regard as it will lay down specific responses to anything that the market throws at you. This will help you to keep calm under pressure. As a starting point, you must at least know what you should do in any given situation. Once that’s established, it can be repeated over and over again. The more it’s repeated, the easier it gets. Eventually, your response is Pavlovian in nature. The market does X – you do Y. You don’t even have to think about it – you just do it. It’s about developing good habits, while rooting out and/or suppressing the bad ones; but it takes time and lots of practice.
Q. Have you traded real money yet and, if so, how did it feel? When you have a losing trade, are you able to take it in your stride knowing that losses are inevitable, or did it eat you up inside?
10. Take responsibility
Lastly, you’ve got to take responsibility for your own actions. Increasingly, the world over, this is something that more and more people refuse to do. Whatever’s wrong in their life, it’s someone else’s fault, never their own. Obese people blame fast food restaurants for their size and sue them. Amazingly, sometimes they even win! When you’re trading, you can’t blame the market for your losses, there’s no one to turn to and point a finger at and say ‘it’s your fault’. The market is always right. Always! If you’re not making any money, it’s down to one person and one person alone: YOU. This pill is just too bitter to swallow for many people, so they blame someone or something else for their problems (i.e. losses), rather than taking full responsibility for their own trading.
Q. Are you prepared to take full responsibility for all your trading decisions? Additionally, are you prepared to examine your own performance and constantly look for ways to improve without blaming others for your mistakes and poor judgement?
So, nature or nurture – which is it?
Probably a bit of both.
People who are naturally disciplined, patient, methodical and industrious etc., etc. are more likely to have an easier time of it than those who aren’t. If you have a gambling mentality, are looking for an adrenaline rush; aren’t really interested in trading and avoid hard work like the plague, then you won’t be too surprised to learn that your chances of becoming a successful trader in the medium to long term are zero. You have to be really honest with yourself about your own personality traits and assess your strengths and weaknesses objectively. If you struggle to do this, paper trade seriously and – as if by magic – your strengths and weaknesses will be revealed to you. That’s the beauty of paper trading (or trading a very small live account) – you have the opportunity to discover at little or no cost whether or not you’re cut out to be a trader. This FAQ has tried to provide a window on the key traits required for trading success. Only you can decide which of them you have (nature) and whether or not you’re prepared to work on the others (nurture), in order to become a successful trader.
