Traders might have different personality traits. What is the best personality type for trading? Most traders focus on finding a trading edge in the market by developing good and robust trading strategies. But many neglect one very important factor for good returns: understanding your personality type.
We believe introverts are more likely to succeed as traders than extroverts. Knowing what personality trait is your most dominant might help your trading career. The article discusses introvert and extrovert traders and their pros and cons.
As a trader, you can gain an additional edge in the market by knowing yourself. Not only are you better prepared, but you get a better understanding of what kind of strategies you can execute equally well in both good and bad times.
In general terms, we believe introverts have a better chance of surviving the learning curve and later prospering.
Table of contents:
The only asset in trading is yourself – you better understand what makes you tick
Most novice traders entering the financial markets expect to make good profits as long as they have solid and robust trading strategies. Little do they know about the behavioral mistakes they are guaranteed to make frequently. The problem is that even by having the best trading strategies in the world, they are useless if you can’t execute them properly!
Even with the best trading strategies, it’s not given you will profit from the strategies. It all depends on your ability to execute the strategy. It all looks easy on paper and in backtests, but the reality is that you will do many mistakes along the way, which reduces the trading profits.
Trading is difficult. To succeed takes both conviction and commitment. Many fail because of their inability to understand themselves.
Juel Anderson writes in Poker, Sex, and Dying that the only asset you have is yourself. In trading, you make your own rules, but make sure they fit your personality.
Understanding your personality is paramount to becoming a successful trader. Emotional and psychological strength is the most important factor in trading success. This article explains how you can go about getting to understand yourself.
What are behavioral biases?
Behavioral biases are another label for cognitive biases. These are systematic patterns or deviations from rational decision-making. For example, many tests have shown that almost everyone is risk-averse by maximizing losses and minimizing gains.
- How to overcome trading biases
- The most common trading biases
Another bias is anchoring. Traders tend to anchor stock prices and look at where the price was yesterday. A somewhat similar bias is the recency bias which makes us focus on what has happened recently and neglect important events further back in time.
And who doesn’t seek confirmation bias? We look for sources and people that confirm our ideas and philosophy instead of looking for more valuable sources that might contradict our beliefs. Twitter is a perfect example of confirmation bias. We follow people we agree with and block people we disagree with. This is not a good way of learning and adapting.
System 1 and System 2 thinking
The number of biases is almost endless. Daniel Kahneman and Amos Tversky have become world-famous for their work on biases. In order to get a better understanding of both yourself and the markets, we recommend reading Kahneman’s Thinking, Fast And Slow, and Rolf Dobelli’s The Art of Thinking Clearly.
Kahneman believes we can divide our thinking into two buckets. The first is intuitive and automatic (system one). The second is rational, logical, and slow thinking (system 2). Traders must use system two to develop trading systems and strategies, while system one can help us taking ad-hoc and intuitive decisions on the spot.
Rolf Dobelli’s book is an easier read than Kahneman’s and explains in an entertaining style 100 different biases.
Why it’s important to understand your personality type in trading
The best personality type for trading can handle these issues:
- How do you handle stress?
- How do you deal with uncertainties?
- Can you cope with losses?
- Are you humble?
- Do you get euphoric after substantial gains?
- Can you detach from money?
- Are you patient?
- Do you prefer decisions based on analysis or gut feelings?
- Are you flexible and willing to change?
- Can you admit defeat or being wrong?
- Being humble and understand you don’t have control of the markets
If you’re confident that you will succeed in the long run, you might not buck under for inevitable losses. As a professional, you must make objective decisions regardless of the situation.
The problem is that fear, greed, and adrenaline interfere almost daily. You need to understand your emotions and what drives your decision-making to offset the risk of falling into all these mental traps.
If you don’t understand your personality traits, you are more likely to make grave behavioral mistakes. To trade well, you need to understand yourself. Otherwise, the market will teach you expensive trading lessons.
Optimist or pessimist, which personality type is best?
The best traders are probably not too pessimistic or optimistic – they are realists. Both excessive pessimists and optimists are poor traders. As with most things in life, balance is the key.
People tend to be either pessimistic or optimistic by nature, but let’s look at some research about personality traits. We found a research report by Chris Dawson calledLooking on the (B)right Side of Life: Cognitive Ability and Miscalibrated Financial Expectations. The results are highly relevant for traders.This is the abstract:
It is a puzzle why humans tend toward unrealistic optimism, as it can lead to excessively risky behavior and a failure to take precautionary action.
Using data from a large nationally representative U.K. sample(36,312),our claim is that optimism bias is partly a consequence of low cognition—as measured by a broad range of cognitive skills, including memory, verbal fluency, fluid reasoning and numerical reasoning.
We operationalize unrealistic optimism as the difference between a person’s financial expectation and the financial realization that follows, measured annually over a decade. All else being equal, those highest on cognitive ability experience a 22% (53.2%) increase in the probability of realism (pessimism) and a 34.8% reduction in optimism compared with those lowest on cognitive ability. This suggests that the negative consequences of an excessively optimistic mindset may, in part, be a side product of the true driver, low cognitive ability.
The findings are better summarized in this chart that I found in the research paper by Dawson:
Based on the chart above, those with high cognitive abilities tend to be slightly pessimistic or realistic but less likely to be optimistic.
On the other hand, those with low cognitive ability tend to be more optimistic.
If you assume high returns based on your backtests, you may not get the results you expect. You might take on too much risk for being too optimistic. If you believe markets only go up, you’ll be unprepared for inevitable downturns and drawdowns.
On the other hand, the study found that knowledgeable people are more prone to extreme pessimism. This is certainly not an advantage either:
Excessive pessimism, often perma bears, is almost certain to lead to poor results. Many brilliant minds make terrible investors due to their overthinking and tinkering. Overthinking is certainly a problem in short-term trading.
The highly intelligent investor Warren Buffett once said:
If you have more than 120 or 130 IQ points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.
If you are too intelligent, it might mean you have a liability – not an asset! AlbertEinstein summarized it beautifully:
- Smart;
- Intelligent;
- Brilliant;
- Genius; and…….
- Simple!
Is the intelligent personality type good for trading?
Intelligence is not a prerequisite for becoming a good trader. On the contrary, being highly intelligent can drag your trading down. Intelligence is highly likely overrated. Discipline, patience, knowledge, attention to detail, and creativity are more important than intelligence. However, you might have an advantage if you are intelligent AND humble.
I haven’t seen much correlation between good trading and intelligence….Many outstandingly intelligent people are horrible traders….Average intelligence is enough. Beyond that, emotional makeup is more important. …Anyone with average intelligence can learn to trade. This is not rocket science.
William Eckhardt made the above quote on page 127 of Jack Schwager’s first Market Wizard book. We believe this summarizes it well!
Intelligence often leads to overconfidence or the urge to understand the markets. Too much confidence is a terrible thing for a trader:
Is the overconfident type good for trading?
No, the overconfident personality type is not suitable for trading. True, confidence is important, but overconfidence is lethal to your account. Coupled with a big ego that is a sure way to the financialrisk of ruinin the markets.
This is whatMorgan Houselwrites about the famous trader Jesse Livermore in his bookThe Psychology Of Money:
After his 1929 blowout Livermore, overflowing with confidence, made larger and larger bets. He wound up far over his head, in increasing amounts of debt, and eventually lost everything in the stock market……Livermore eventually took his own life.
If you have no fear of failure, you will eventually fail in trading. Of course, fear of failure can’t paralyze you, but no fear of failure is just as bad. Overconfidence makes you blind to risk and makes you feel better than you are. Luck and randomness are much bigger factors in trading than most realize. You have to be humble. The inevitable result is that you take on more risk than you should.
Overconfidence is bad because trading is about survival. Getting rich requires risk-taking, but you need to survive to exploit the market’s edges. There is no point in spending time finding trading edges if your account goes to zero.
Trading is about persistence and survival. The US President Calvin Coolidge nailed it:
Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated failures. Persistence and determination alone are omnipotent.
Coolidge’s proverb nails it!
Trading is a mix of skill and luck. In the short term, it’s about luck; in the long term, it’s about skill.
Let’s look at a research report about poker that examined skill and luck: “Is Poker a Game of Skill or Chance? A Quasi-Experimental Study?” Poker is highly relevant to trading because it involves making decisions with an uncertain outcome.
The conclusion from this research study was quite interesting:
……results showed that experts did not outperform average players in terms of final cash balance. Rather, card distribution was the decisive factor for successful poker playing. However, expert players were better able to minimize losses when confronted with disadvantageous conditions (i.e., worse-than-average cards). No significant differences were observed between the game variants
Can an introvert become a trader?
Merriam-Webster defines an introvert as someone who is characterized by introversion, someone who is reserved, shy, and likes spending time alone.
Typically, an introvert doesn’t seek attention and often feels exhausted after social engagements. They like to keep in the background. When they get things wrong, they tend to blame themselves and generally want to ensure it will not happen again.
Because of this, introverts often have a personality style that finds it hard to execute trading signals, despite being analytical, disciplined, meticulous, focused on details, and like doing research. When it comes to risk-taking they tend to be risk-averse.
Can an extrovert become a trader?
According to Merriam-Webster, ” extrovert ” means “turned outward, ” which means extroverts are talkative, optimistic, social, and like having people around them. They get bored quickly and need stimulation. They are mentally “aggressive”/competitive, like going to parties, and are more willing to take risks than introverts (precisely because risks keep them stimulated).
Typically, extroverts are more prone to take risks than introverts, they like to use their gut feeling, they crave action and stimulus, and are usually impulsive.
Are you introverted or extroverted?
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 extrovert’s taste for risk!
However, no one is neither a total extrovert or an introvert. We score somewhere along the continuum and have some traits from both sides, and unfortunately, we can’t cherry-pick our personality traits.
If you know which category is your dominant force, it can help you in your daily trading: You can quickly know in advance if you can execute and trade certain types of strategies, and you’ll have a better understanding of how you handle inevitable drawdowns and losses.
In short, you should have a better understanding of your risk tolerance. This guides what kind of trading strategies/systems you can trade and what kind of leverage to use.
Establish your strengths and weaknesses to determine your trading personality
More important than who you are, is to know why you are as you are and why you do what you do.
To understand that,we recommend writing down your strengths and weaknesses. Look at yourself from a distance and try to be as objective and neutral as possible. By putting your traits down on paper, you force yourself to express your thoughts clearly.
However, many personality tests show that our introspection is limited. We often think of ourselves as entirely different than who we are.
You can test this yourself by asking someone who knows you well. Tell them to write down your strengths and weaknesses and see how they fit your observations. Most people are surprised by the difference in opinions! You can equally well take online personality tests; the most famous is Myers-Briggs.
You might ask what all this has to do with trading. Our experience, after full-time trading for two decades, is that it’s crucial to understand your personality traits and your strengths and weaknesses. All your dominant personality traits will sooner or later influence your trading and, thus, your profits (or losses).
What is the best personality type for trading?
There are, of course, many types of traders, but we believe certain assets are instrumental for success in trading stocks, futures, options, or other financial instruments.
The best personality type for trading can deal with the aspects below:
- It would help if you liked working alone.
- Self-going.
- An analytical mindset.
- Like to crunch numbers.
- Trust yourself and your thinking.
- Like keeping detailed trading records.
- Possess self-control.
- Keep detachment to money. Your bankroll is merely a means of keeping score.
- Last but not least: have a real passion for trading.
Who scores the best – introverts or extroverts traders? As far as we can see, introverts score the best among those personality traits above. Of course, it’s impossible to fit within one bucket, but in general terms, we believe introverts are better suited for trading well.
Brett Steenbarger, a famous trading coach, has made a personality test for traders. We recommend spending a few minutes on that test. Can you become a trader?
What skills do you need to be a trader?
Any form of trading and investing means responsibility for your decisions and results. You need to analyze and work on your own. Trading can sometimes be very dull and feel like a grinding routine. If you’re an extrovert, can you handle boredom? Sometimes trading is just a waiting game. Why?
Because the best trades are often the ones you do not trade. David Cohen illustrates this very well in his book called Fear, Greed and Panic – The Psychology of The Market.
Cohen makes an interesting analogy to experiments with 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 until they are exhausted. Intermittently rewarded rats were endlessly persistent, and trading creates just such a pattern of reinforcement.
What’s the relevance? If you consider yourself an extrovert, trading may lead you to overtrading.
Conclusion: What is the best personality type for trading?
After reading this article, we hope you have a good idea of who is best suited for trading. The best personality type for trading might be hard to determine, but as a general rule, we believe introverts are more likely to succeed in trading than extroverts.
Introverts have more and better traits that fit into what we consider the main factors for success. Of course, nothing is written in stone, and there is always an exception to the “rule”.
But do yourself a favor, and think hard and long about your personality type. Build your trading around your strengths, not your weaknesses.
FAQ:
– What are behavioral biases in trading, and how do they affect decision-making?
Behavioral biases, also known as cognitive biases, are systematic patterns or deviations from rational decision-making. These biases, such as risk aversion, anchoring, and confirmation bias, can influence traders’ decisions and impact trading profits. Recognizing and overcoming these biases is essential for effective trading.
– How can introverts succeed as traders?
Introverts can succeed as traders by leveraging their analytical, disciplined, and detail-oriented traits. While introverts may be risk-averse, understanding their risk tolerance helps in selecting suitable trading strategies. Developing self-control, patience, and a passion for trading are key attributes for introverted traders.
– Can extroverts become successful traders?
Extroverts, characterized by being talkative, social, and risk-taking, can become successful traders. However, they need to manage impulsive behavior, handle boredom during slow market periods, and avoid overtrading. Recognizing the strengths and weaknesses of their extroverted traits is crucial for trading success.
