Trading Psychology

Understanding yourself


Surprising as it may seem, many people are frightened of success, preferring to remain in the shadows of anonymity, shying away from anything which may raise their profile either within their peer group or with the media. Others however actively crave success and adulation, and in today’s ‘celebrity’ obsessed world, there are myriads of examples from TV, print, and online. So what makes the first group so introvert, and the second so extrovert? The answer lies in our values and belief systems.

These are created during the first years of our lives, as our personalities develop, moulded initially by our parents, their moral codes and values, and later in our childhood by mentors and teachers who reinforce and expand these codes of behaviour and ultimately our view of the world. Our value and belief system covers all aspects of our behaviour, and in particular will determine our view of success and failure, as well as our attitude to risk and money. For many, the prospect of winning the lottery is an ever real dream, as we imagine sitting by the pool, drink in hand, in some warm climate with the yacht in the marina and the Bentley on the drive.  For the few, who do win, the dream often becomes a nightmare, as the individuals concerned have no experience or the core values to deal with such large sums of money, with many declaring themselves happy once all the money has gone.

Hard to believe, but this is how ingrained and inflexible these value are, dominating every aspect of our lives, and dictating how we react to situations, and interact with our partners, wives, husbands, family members, colleagues and friends, and in essence creating the person that people know as you. In the last twenty years, personality profiling and psychometric tests have become the norm in the business world, as major organisations around the world rely less and less on the traditional interview, and more and more on a series of carefully designed mathematical and textural multiple choice questions, which are hard to fake, and reveal much about your underlying attitudes, values, beliefs and standards. In short, whether you are likely to fit into the corporate culture of the organisation. In addition, these tests will also reveal your view of success and failure, your ambitions, your view of the world, whether you’re intuitive or an analyst, and how you are likely to react in times of stress.

All of these are key to your future employer, who as such is trying to assess your personality and whether you are ultimately suitable for the role within the corporation, and likely to ‘fit into the team’. So what has this to do with making money in the financial markets ? The answer is everything, as put simply, you cannot hope to be successful if your underlying values and beliefs dictate otherwise, as you will always be battling the greater forces from within and which will ultimately determine your success or failure. This is not to say however, that you cannot be successful. It is simply a question of matching your personality and profile to the strategy and market that suits you best, and which therefore offers you the best chance of success.

However, it is not simply the desire for success that will make you a winner, it is all the other personality traits that combine to create the perfect blend of desire, hunger, discipline, determination and attention to detail that will ultimately make you a winner. In any form of business, and I consider what I do to be a business, there are always profits and losses, and whether you run a small business from home, an online Internet business, or a multi national corporation, it is generally the management of loss that dictates success, not the other way round. For any golfers reading this, I’m sure you have heard the old saying which goes along the lines of ‘drive for show’ and ‘putt for dough’ – in other words the money is in the small things you do right in the business, not in the big picture. Managing your losses is about attention to detail – in the manufacturing environment it’s about reducing the number of faulty items leaving the factory, which in turn increases profits, customer satisfaction and long term customer loyalty.

The same is true in the financial world, and will apply to both your trading and investing. The key however in our world is how you view a loss, and how you will react, because make no mistake, you cannot generate a profit in trading without making losses. It is how you manage and control these losses that will dictate both whether you are comfortable in the market, and ultimately how much money you can make, and to reinforce this point, consider the following example and imagine how you might react under these circumstances. Imagine that you are at the races, and you have $100 in your pocket. You bet on the first race and win, and double your money to $200 – what are you likely to do next?

  1. Bank $100 as you know you cannot go home with a loss and spend the profits enjoying yourself
  2. Bank $100, and continue betting with smaller amounts
  3. Bank $200 and stop betting
  4. Bank nothing and continue betting but with smaller amounts
  5. Bank nothing and continue betting with the same ratio

There is of course no right or wrong answer to the above question, and with ‘virtual’ money it is not a real situation, but at least the above ( I hope) will stop and make you think, and as a result will perhaps give you an insight into what is your own perception of money and risk, as this is what lies at the heart of being involved in financial investing and trading. Indeed it will surprise you to know, that many of the best traders and investors are not the wild city pit traders of the 80’s and 90’s epitomized by Hollywood films such as Gordon the Gecko and Rogue Trader.

Pit trading (or much of it) is long gone, with most trades executed electronically, and virtually no personal contact between the two parties. In fact, these traders are conservative in the extreme, focusing on managing their losses, researching the market carefully, trading cautiously with small leveraged positions, and in short, managing their risk and money carefully to ensure that they survive in the longer term. The returns they generate are relatively modest, but they are consistent, and this is one of the factors that makes them successful. They do not trade the farm on one trade, but look to build on a series of small successes, rather than one large profit followed by equally big losses. Indeed I suspect that if you profiled many of these traders, you would find attention to detail, determination, introvert behaviors and a fear of failure at the top of their list of personality traits, rather than any overt desire to be an extrovert or hunger for fame and riches.

Remember, we are not in this for the thrill, we are in this to make money – short and simple, and as such is a business like any other. So, what does all this mean for us as traders, generally working alone, often from home or in the evening after work, trying to develop an additional income stream for our family in order to provide a better standard of living? Well, the key point I want you to take from this section is that you MUST understand yourself, and your own personality before even thinking of getting involved in the financial markets, and the hardest part of this is to be honest with yourself. The ideal solution is of course to take one of the many personality profile tests which are now available, and to spend $50 or $100 dollars finding out all about yourself in a written report.

Some things you discover may surprise you, some may even come as a shock, but the money you spend will be a fraction of the amount you could lose in the markets, if you fail to understand who you really are before you start. In addition to giving you a detailed insight into you, the person, the report will also provide you with a blueprint for your trading and investing, and may well give some firm signals as to which markets, and the approach to these markets, that you should take in order to best suit your profile, and give you the greatest chance of success. One of the most common tests is referred to as the Myers Briggs test, which contends that individuals fall into one of four pairs of behavior patterns:

  1. Extroverted or introverted
  2. Sensory or intuitive
  3. Thinking or feeling
  4. Judgemental or perceptive.

These behaviour patterns combine to form the 16 basic personality types that will tend to dictate the natural preference for behaviour in a given situation. There is no right or wrong type. The assessment is based on a series of questions that will indicate your particular behaviour preference. This is time and money well spent. After you take a test or two or fill out a profile, you’ll have results that will be very close to the truth and give you an accurate picture of your personality. At this point, you will probably ignore the negative aspects and admire what you feel are the more positive ones.

This is normal. Humans in general are optimists — why would everyone normally expect stocks to rise if this were not the case? Here’s a tip — concentrate on the negative, as it is in these areas that you are likely to find the Achilles heal which will cause you your greatest problems in making money from the financial markets. Finally, even if you decide not to pay for a one of the above tests, please take a few hours of your time to sit down and think about you, your personality and how you react to situations where profit and loss are involved. Think about how others may see you, as they will have a more dispassionate view of you – think about whether you are disciplined, tidy, untidy, always late, always early, as this will give you clues as to your planning and attention to detail. Ask yourself this question – if my first trade was a losing one, would I have the discipline to move on to the next one and forget about the loss.

Try to remember times of stress in your life – we all have them – how did you react – were you calm and collected and able to function, or reduced to a wreck and others had to take control. This is not to imply that trading and investing is always stressful. In fact, executed correctly it is actually rather boring and mechanical as the central objective is to trade with all the decision making removed before we enter a position in the market, using pre-defined entry and exit points. Indeed whilst writing this report for you I have been trading with live positions, but not ones that I constantly watch and monitor as this leads to stress, burn out and ultimately a quick exit from the market. So take time to think about you and what made you the person you are today, and in particular the influence of parents, teachers and mentors in the early years. Much will depend on this analysis and also provide the framework for you as a successful trader to understand why you react in certain ways when real money is at risk. My first ever trade was a losing one – in fact I lost almost £5,500 and I remember it to this day – but I survived, learnt my lessons and moved on. I hope this brief introduction will save you from making the same painful mistakes that I made.

The point is however, that I was able to move on and put this down to experience – this is one of the lessons you will need to learn to be successful, but only if your personality allows you to act in this way. So get started now, and start exploring your inner self as self-awareness is one of the keys to success!

If you are interested in learning more about the psychology of trading, this forms one of the five core modules in The Complete Forex Trading Program, and you can discover more about this module and others on the course by clicking the link here:

Quantum Trading Education – The Compete Forex Trading Program