Tuesday, May 12, 2009

Learning Styles and Trading Success: Are You Playing to Your Strengths?

A much neglected topic within trading psychology is learning styles and how those impact trading. In my experience working with traders, I find that many times their performance is compromised by a mismatch between how they are approaching markets and how they optimally process information.

Consider the following learning and trading styles:

* The Analytical Trader - Breaks markets and stocks down, making decisions from the data collected. This includes the fundamental stock investor and the mechanical system trader.

* The Visual Trader - Trades off information from visual presentations, including price/volume charts, depth of market screens, and indicator displays. This includes many discretionary traders who rely on technical analysis.

* The Auditory Trader - Makes decisions based upon information from human interaction, including conversations with analysts, assistants, brokers, and peers. This includes many pit traders.

* The Synthetic Trader - Assembles information from a variety of sources to find overarching themes and patterns that inform trading decisions. This includes many global macro traders.

* The Kinesthetic Trader - Actively participates in markets to sustain a feel for how those markets are trading. This includes many true scalpers and market makers.

I have known successful traders who draw upon all of these information processing modalities. The issue is not which is best, but rather which is optimal for particular traders. When visual traders become too analytical and overanalyze markets out of anxiety, they tend to underperform. When auditory traders overemphasize market charts out of uncertainty, they miss key data. When frustrated kinesthetic traders look at too much information in a synthetic way in a desire for certainty, they lose their feel for markets.

Many times the ways we cope with stress, risk, and uncertainty take us out of the game by changing how we engage markets. It is difficult to sustain consistency in processing market information if we don't understand our cognitive styles and strengths.