In my book The Psychology of Trading, I referred to personality traits that tend to distinguish successful traders from less successful ones. Several of these traits are also likely to influence the degree of success traders are likely to have in adopting a trend-following approach to trading. Below are several self-assessment questions that might be useful in determining whether you’ll face particularly great challenges in riding market trends. Please write down “yes” or “no” answers to each of the twelve questions before reading further:
- When something goes against you in the market, do you often find yourself venting your frustration?
- Do you enjoy (or as a child did you enjoy) roller coasters or other thrill rides?
- Do you often find yourself procrastinating over work?
- Do you consider yourself moody—sometimes rather up, sometimes rather down?
- Would you generally prefer going out and partying with friends rather than staying at home with a good book or movie?
- Do you often find yourself apologizing to others because you forgot to do something you were supposed to do?
- Are you generally high-strung, tense, or stressed?
- If given the choice at a buffet, would you prefer to try exotic foods you’ve never heard of rather than familiar dishes?
- 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?
- After a losing trade, do you often feel guilty or get down on yourself?
- Have you experimented with or regularly used two or more recreational drugs (other than alcohol) in your life?
- Are you often late for appointments or for social plans you’ve made?
If you indicated “yes” to most or all of questions 1, 4, 7, and 10, you most likely score high on a trait called “neuroticism”. Neuroticism is the tendency toward negative emotional experience, and it shows up as anger, anxiety, or depression.
If you responded “yes” to most or all of questions 2, 5, 8 and 11, you probably score high on a trait called “openness to experience”. Openness reflects a tendency toward sensation seeking and risk-taking.
If you answered “yes” to most or all of questions 3, 6, 9, and 12, you potentially score low on a trait called “conscientiousness”. Conscientiousness measures the degree to which an individual is oriented toward duty, responsibility, and dependability.
Other things being equal, the ideal personality pattern for trend following is one of high conscientiousness, low neuroticism, and low openness. A good trend-follower will stick with rules and systems (conscientious), won’t impulsively enter or exit trades on the whim of emotion (neuroticism), and will trade for profits, not stimulation (low openness). In my experience, some of the best systems 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.
System traders often focus their research and energy on defining the optimal parameters for a system’s profitability. Equally important is finding a trading strategy that meshes with one’s personality. Traders who are relatively risk-averse may trade shorter time frames and/or smaller positions than those who are risk-tolerant. Traders with a higher need for novelty and stimulation may benefit from trading a greater number of stocks and/or markets rather than focusing on a relative few. Are some personalities simply unsuited for trading? I would say yes, just as some personalities are not cut out to be fighter pilots or surgeons. It is difficult to imagine a trader enjoying ongoing success without the capacity for disciplined risk-taking.
It is not at all unusual to find that a trader is losing with a trend following approach because he or she is acting out unmet personality needs in the market. One of the best trading strategies one can employ is to find adequate outlets for attention/affection, achievement, self-esteem, emotional well being, and excitement outside of trading. 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 a 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!
Brett N. Steenbarger, Ph.D.
