Personality, Emotions, And The Psychology Of The Trader

Personality, Emotions, And The Psychology Of The Trader

Tracking Your Confidence Level

Every trade that is entered reflects a judgment one is making.  But how confident are you that the trade is an excellent one?  Most people can’t answer the question because they are not really evaluating their trades.   The ability to improve your trades requires a basis for self auditing your own performance.   An effective way of doing this is by applying a rating system.

Tracking Your Confidence Level

Every trade that is entered reflects a judgment one is making.  But how confident are you that the trade is an excellent one?  Most people can’t answer the question because they are not really evaluating their trades.   The ability to improve your trades requires a basis for self auditing your own performance.   An effective way of doing this is by applying a rating system.

Rate it on a scale of 1- 5.  A rating of  5 being you believe the conditions are excellent and you are very confident it will work.  A rating of 3 means it’s really a hunch trade. A rating of 2 means that the trader has a hunch, but it is weak.  A rating of 1 means there are actually indicators telling you it’s not a time to buy or sell.

How valid is this process of ranking your trades?  By rating each trade, and then comparing the results, the trader gains valuable insight into mistakes that were made.   Are your losses associated with hunch rated trades receiving a 3? Are your wins more associated with 5 rated trades?   Experience using this system has shown that traders can obtain insight into whether their hunch trades work. If they do, then continue to trade because personal intuition or hunches can be effective.  But if losses in hunch trades outnumber the losses in high rated trades then your hunches are not good and you should treat them as contrarian indicators!

Using a self confidence rating system allows any trader with any level of skills and techniques to evaluate their trades.  If a rating of 3 is assigned to a hunch trade, then what makes a trade get a 4 or 5, and on the other side, a 1 or 2?   Essentially, a 5 is the kind of trade that meets all the technical conditions for entering.  The price action is in the direction of the key trend.  The day trend or 4 hour trend is confirmed by lower time frames such as the 30 or 15 minutes.  The price has tested or penetrated a key Fib line, trend line, or moving average.  The volatility is at an extreme.  In short the conditions are aligned to permit the entry.  A 4 ranking would mean that it’s not meeting every condition but several and there are no contrary indicators.  A ranking of a 3 or 2, as we have discussed, is essentially the emotional trade.  Your emotions will always be part of trading and needs to be respected.  This ranking system allows you to use your intuition, hunches, or other emotional factors to develop a level of confidence for a trade.

Go for it.   A rating of a 1 means that there are important red flags, negative conditions that say don’t buy or don’t sell. Essentially you don’t do those trades.

The use of such a process also improves profitability because high rated trades would receive more lots than lower rated trades, once a trader has really applied this rating to many trades and has established a performance record that lends itself to evaluation.  About 20 trades is a good sequence to fine tune the rating systems. 

 When to Stop Trading

 It’s important to know when not to trade.  One of the common problems of new traders is overtrading.   Tips to get a handle on this are:

If you have 5 trades in a row wrong, stop trading for 1 day.

If you have 5 trades in a row right, stop trading for 1 day.

Know Your Trading Personality

Part of the equation of success is the personality of the trader. The personality of the trader shapes the strategy as well as the results. It is impossible to separate emotions from the trade. This is a fact of life and the challenge is to recognize ones own personality, limit the risks associated with your personal style and channel the emotional energy correctly.  How can this be done?

A good beginning is to recognize your own personality as it pertains to trading.  There are several personality types and the field of psychology is devoting a lot of work to modeling what emotions are.  In fact an entire new field of computation psychology and artificial chemistry is working towards mapping how emotions result in behavior.   But you don’t have to wait until we are at the point where two drops of greed, mixed in a base of fear, results in the predictable market reaction.   But there is no doubt that the resulting trade is an emotional process that is quite complicated. 

Getting a handle on how to use emotions is to profile your own personality if possible. Translated to trading we can generate several categories.  Carl Jung, one of the great contributors to the field of psychology,introduced the  concept of archetype, categories that profile types of behavior and personality.    There are many ways to characterize personality. There is no perfect personality for trading forex. Each personality has certain advantages and disadvantages.  Here are four forex trading archetypes.  Which one describes you?

 Archetypes In Forex Trading – Which One Are You?

The Gladiator/Samurai – This person loves to trade even more than winning or losing.  Being in the action is the objective.  We call it the gladiator type because gladiators had no fear of death and focused on the battle itself.   A gladiator type of forex trader has the advantage of focusing on being committed to the trade without being frenetic about the result.   The disadvantage of this personality is that it can lead to overtrading and unnecessary losses.  Few gladiators survive for long.

The Warrior – Loves trading but wants to win.  Avoids trades that are not highly probable and has no allegiance to any one market.

The Gunslinger/Surfer – Relies on emotional and gut feeling to enter or exit a trade. This type of personality often likes to surf and jump from one trading opportunity to another.

The Sniper – Analyzes the market, takes the trade when the market moves only on the conditions they have specified.   This trading style is similar to swing trading or waiting for a key Support or Resistance to be tested. Many people do not have the patience, or the wisdom to be sniper trader.

The Lamb – This kind of trader reacts to  market moves by running with the crowd.  When a lot of such traders come into the market it adds fuel to the momentum of the prices and creates emotional contagion.  This is a very risky trading style because  very often the moment that the trader perceives the crowd behavior it is often too late and the price has been exhausted.

The Black Sheep – The trading behavior of this personality is contrarian. The trader does not join the crowd, but seeks an opposite opportunity.  It takes courage to be a black sheep. But often it keeps the trader in the “black” in profitability.

What makes forex exciting is that any of theses personalities can result in profitable trading.  The forex market provides opportunities for trades that enable each personality style to be applied.

Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com