Are there personality patterns common to successful traders? This is a question that interests aspiring traders and trading firms alike. The usual way of addressing the issue is to offer traders a set of pencil-and-paper questionnaires that evaluate personality traits and then see if the results correlate with trading outcomes.
There is much to be said for the questionnaire method of assessing personality and performance. Questionnaires are easy to administer and score. There are also highly reliable, valid, and standardized measures of personality traits in the psychological literature, such as the NEO PI-R based upon the work of Costa and McCrae. Research coming out of the London Business School has found that personality traits--including overconfidence and sensation-seeking--are significantly associated with trading results. This corresponds to my own, more informal, findings that high degrees of neuroticism, coupled with sensation-seeking and low conscientiousness, are associated with poor trading outcomes.
There are several potential weaknesses to the questionnaire approach, however. First, and most fundamentally, it is not at all clear how much of the variance in real world trading outcomes is accounted for by self-reported traits. My investigation with Andrew Lo's research team at MIT did not find any strong association in a sample of traders. Nor is it clear that the universe of traders is homogeneous, with a single set of optimal personality traits. Just as different personality styles are associated with specialties within medicine--psychiatry vs. surgery vs. radiology--it may well be the case that different personality patterns typify successful market makers vs. portfolio managers vs. mechanical system traders.
Equally problematic, questionnaires tend to be face valid; it is obvious to respondents what is being asked of them. This makes it easy to manipulate the results, particularly in employment settings where test-takers will provide the most socially desirable responses.
For these reasons, it can be worthwhile to supplement the use of questionnaires with measures of trader psychometrics. As David Norman of the Illinois Institute of Technology indicates, we can learn about traders from an assessment of their trading, just as we can learn about trading by asking questions of traders. Dr. Norman's Trader DNA program is an effort to collect metrics on one's trades, so that traders can identify their own patterns of successful and unsuccessful trading.
Having utilized this approach in my own work with traders, I would like to propose that trader psychometrics can reveal several important dimensions of trader personality that are useful supplements to the information gleaned from questionnaires:
1) Frequency of Trading - I propose that this is a manifestation of a trader's need for stimulation and tendency toward sensation-seeking. The trader who needs/desires to be active in the marketplace (e.g., the day-trader) displays different needs for stimulation than the long-term investor;
2) Size of Positions Relative to Portfolio Size - This is a direct measure of risk-taking vs. risk assumption;
3) Average Size of Losing Trades vs. Winning Trades - This assesses the prudence or conscientiousness of the trader in managing risk. Traders with large outliers among losing trades display a lack of control over risk.
4) Number of Different Positions and Strategies Employed - This is a measure of behavioral complexity, which in turn has been found to be associated with superior performance in a variety of work settings. Such complexity may also prove to offer a degree of insulation from changing market conditions.
The trader psychometrics address many of the shortcomings of pencil-and-paper self-report personality questionnaires. They are easily gathered by computer and need no psychological interpretation and administration. They represent objective, observable data that are not subject to subjective interpretive bias. The metrics also cannot be faked by traders.
Most important of all, however, the trader psychometrics create a process-based assessment. We can see how patterns of trading change over varying market conditions and across different markets and strategies. The research of MacCrimmon and colleagues, for example, found that risk-assumption has a very strong situational component: people who are risk-takers in one situation (personal life, for example) may be risk averse in other situations (finances). The trader psychometrics view personality as it is manifested in the specific trading context. We can detect personality at work as trading proceeds. This makes trading metrics a fine supplement to more global personality measures.
Finally, an advantage of trader psychometrics is that they can be collected by traders themselves and used to identify patterns of success and failure. For instance, traders can track their trading and learn whether they become more or less risk averse as markets become more volatile; whether they become more prudent over time; etc. In this sense, trader psychometrics are both assessment tool and learning tool.
Your personality affects your trading, but your trading also reflects your personality. A well-rounded approach to assessment looks at the trader from both angles, identifying elements of performance associated with the person and with the trading situation.
RELATED POSTS:
How Personality Affects Trading Performance
Steps Toward Becoming a Better Trader
A Personality Questionnaire for Traders
Interpreting the Personality Questionnaire
Showing posts sorted by relevance for query trading personality. Sort by date Show all posts
Showing posts sorted by relevance for query trading personality. Sort by date Show all posts
Monday, May 21, 2007
Tuesday, February 06, 2007
Deepening Our Understanding of the Stock Market's Personality
When we refer to the "personality" of an individual, we're creating a shorthand that describes that person's tendencies: How they think, feel, behave, and relate to others. Our categories of personality--such as calling someone "Type A" or "narcissistic"--help us understand that person, predict their behaviors, and communicate our understanding to others. To be sure, personality traits don't capture all of the variance in human behavior; much is determined situationally. Still, human behavior is sufficiently patterned that we benefit from our various categories.
When we perform studies of historical market behavior--or when we create a mechanical trading system--we are attempting to capture some aspects of the stock market's personality. Each study or system is looking for a recurring pattern. We might say that the sum of patterns across multiple time frames defines the personality of a given market. Some markets have "trending" personalities; others are "volatile". With markets, as with people, such personalities don't capture all the variance in the behavior of a stock or index. Situational factors, from interest rate movements to geopolitical developments, play important roles. Still, we see sufficient patterning of markets that it is meaningful to say that, for example, we've been in a low volatility bull market.
When we deal with a person, we do not expect that his or her personality will radically shift from day to day. The tendencies that have stood out in the recent past are assumed to hold for the immediate future unless we have some reason to believe that the person has changed or that the situational influences are unique. Similarly, traders assume that past patterns will carry forward to the immediate future. This is just as true for discretionary traders as mechanical systems ones: whether we trade off of chart patterns or quantitative relationships, we are assuming that patterns we've noticed in the past will, in the absence of situational influences to the contrary, carry forward to the near-term future. Without that assumption--the assumption of some patterned nature to markets--trading makes no sense whatsoever.
We tend to think of discretionary trading--trading based on the real-time judgment of the trader--and mechanical trading--trading based on a defined system of entries, exits, and money management--as opposite sides of the trading spectrum. In reality, however, both are undertaking the same thing: capturing market patterns. It is for this reason that the development of trading systems greatly benefits from the expertise of traders who employ their judgment and discretionary traders benefit from the decision support of knowing quantitative market patterns. As I suggested in a post a while back, the ideal is a trader with both head and gut: someone who has a feel for market patterns and a head for market odds.
During my morning trading sessions, I have sometimes referred to the Odds Maker module of the Trade Ideas screening program as one bridge between discretionary and system trading. Indeed, today's Weblog entry mentions an Odds Maker pattern regarding downside breakouts of opening trading ranges. I am a discretionary trader, but I find it helpful to know that, during the past three weeks of trading, the great majority of downside breaks of the opening trading range have been reversed. Indeed, on balance, one would have made nice money buying such breaks rather than joining the sellers. Knowledge, indeed, is power.
What Odds Maker is doing is capturing a piece of recent market personality. A broader piece of market personality is captured by a trading system that has been tested over many years, such as the one recently mentioned in my post. Such patterns and systems won't account for all market behavior--their absolute edge might be relatively small--but followed consistently over time, they can yield major profits. The bullish trader who has bought market weakness has consistently outperformed the bullish trader who has bought strength: knowing the market's short-term personality has been crucial to the success of the active trader.
The bottom line? Two important implications:
1) Quantitative assessment can aid subjective judgment. The psychologist relies on psychological tests; the fighter pilot relies on radar readings; the poker champion knows the odds of each hand. Knowing patterns--whether of clients in therapy, opposing football teams, or markets--helps professionals make better decisions.
2) The expertise of subjective decision makers can aid the development of quantitative tools. I have seen many programmers at trading firms who have programming expertise and no feel whatsoever for *what* to program. It's when the expert trader shares patterns with the programmer that a superior trading system can be developed--the kind of system that, then, can offer the aforementioned decision support.
Can discretionary traders form partnerships with quantitative system developers for their mutual benefit? My next post will propose a vision for just such an arrangement.
When we perform studies of historical market behavior--or when we create a mechanical trading system--we are attempting to capture some aspects of the stock market's personality. Each study or system is looking for a recurring pattern. We might say that the sum of patterns across multiple time frames defines the personality of a given market. Some markets have "trending" personalities; others are "volatile". With markets, as with people, such personalities don't capture all the variance in the behavior of a stock or index. Situational factors, from interest rate movements to geopolitical developments, play important roles. Still, we see sufficient patterning of markets that it is meaningful to say that, for example, we've been in a low volatility bull market.
When we deal with a person, we do not expect that his or her personality will radically shift from day to day. The tendencies that have stood out in the recent past are assumed to hold for the immediate future unless we have some reason to believe that the person has changed or that the situational influences are unique. Similarly, traders assume that past patterns will carry forward to the immediate future. This is just as true for discretionary traders as mechanical systems ones: whether we trade off of chart patterns or quantitative relationships, we are assuming that patterns we've noticed in the past will, in the absence of situational influences to the contrary, carry forward to the near-term future. Without that assumption--the assumption of some patterned nature to markets--trading makes no sense whatsoever.
We tend to think of discretionary trading--trading based on the real-time judgment of the trader--and mechanical trading--trading based on a defined system of entries, exits, and money management--as opposite sides of the trading spectrum. In reality, however, both are undertaking the same thing: capturing market patterns. It is for this reason that the development of trading systems greatly benefits from the expertise of traders who employ their judgment and discretionary traders benefit from the decision support of knowing quantitative market patterns. As I suggested in a post a while back, the ideal is a trader with both head and gut: someone who has a feel for market patterns and a head for market odds.
During my morning trading sessions, I have sometimes referred to the Odds Maker module of the Trade Ideas screening program as one bridge between discretionary and system trading. Indeed, today's Weblog entry mentions an Odds Maker pattern regarding downside breakouts of opening trading ranges. I am a discretionary trader, but I find it helpful to know that, during the past three weeks of trading, the great majority of downside breaks of the opening trading range have been reversed. Indeed, on balance, one would have made nice money buying such breaks rather than joining the sellers. Knowledge, indeed, is power.
What Odds Maker is doing is capturing a piece of recent market personality. A broader piece of market personality is captured by a trading system that has been tested over many years, such as the one recently mentioned in my post. Such patterns and systems won't account for all market behavior--their absolute edge might be relatively small--but followed consistently over time, they can yield major profits. The bullish trader who has bought market weakness has consistently outperformed the bullish trader who has bought strength: knowing the market's short-term personality has been crucial to the success of the active trader.
The bottom line? Two important implications:
1) Quantitative assessment can aid subjective judgment. The psychologist relies on psychological tests; the fighter pilot relies on radar readings; the poker champion knows the odds of each hand. Knowing patterns--whether of clients in therapy, opposing football teams, or markets--helps professionals make better decisions.
2) The expertise of subjective decision makers can aid the development of quantitative tools. I have seen many programmers at trading firms who have programming expertise and no feel whatsoever for *what* to program. It's when the expert trader shares patterns with the programmer that a superior trading system can be developed--the kind of system that, then, can offer the aforementioned decision support.
Can discretionary traders form partnerships with quantitative system developers for their mutual benefit? My next post will propose a vision for just such an arrangement.
Saturday, April 08, 2017
The Real Reason Traders Lose Money
Before launching into the actual reason traders lose money, let's step back and review an important principle: Most accepted wisdom in the trading world consists of kernels of wisdom that have been blown up into Grand Ideas that are utterly invalid.
The poster child for this phenomenon is the idea of discipline. Successful trading requires having rules that guide decisions and actions. Success requires the consist following of those rules. Given a set of valid rules, the better performer will be the disciplined person who trades with fidelity to those rules. Makes sense.
But once we blow discipline into a Grand Idea and insist that Discipline is the source of all trading success, we then have mentors and coaches who harangue traders with journals and checklists to monitor every minute activity. This ultimately serves two purposes: it makes traders so self conscious that they are no longer attuned to market patterns, and it so routinizes trading that traders become unable to adapt to changing market conditions. As a general principle, discipline makes sense. As a supposed formula for trading success, Discipline ensures consistency in losing.
The same is true for ideas of emotional awareness and mindfulness in trading. Great ideas in context that, once blown into Great Principles, divert traders from the real work for identifying objective patterns playing out in the marketplace. If a trader trades randomness with self awareness, they will be a keen observer of their own demise.
Which brings us to the topic at hand: the real reason traders lose money.
One of those nuggets of wisdom that gets blown out of proportion is the idea that success comes from trading in a way that fits your personality. There is certainly truth to that. If you're an extroverted person, your idea generation is likely to benefit from talking with knowledgeable market participants. If you're introverted, you are more likely to benefit from reflection and analysis. Taken to the level of Grand Principle, however, the idea that success will follow from expressing your personality in markets becomes a kind of anything goes, do whatever you feel like justification for poor decision making.
Because *that* is the real reason traders lose money: They ARE trading their personalities. Show me a losing trader and I'll show you someone acting out their personality in risk-taking. Consider examples drawn from the "big five" personality traits:
* The trader who lacks conscientiousness in his/her personal life fails to achieve consistency in trading. The trader who is overly conscientious fails to innovate when market conditions change.
* The trader who lacks emotional stability in his/her life trades impulsively and emotionally. The trader who is highly emotionally stable has difficulty taking proper risk out of fear of upsetting the emotional apple cart.
* The trader who is highly introverted or extroverted allows internal or external stimuli to interfere with decision making.
* The trader who is highly open to experience becomes so enamored of new ideas that his/her trading becomes skewed by the latest shiny toy. The trader lacking openness to experience finds one way to make money and can't do anything else even after that one way loses its edge.
* The trader who is very likeable has difficulty tuning out people and becomes easily distracted by noise. The trader who lacks likeability alienates the very colleagues that could help inform his or her trading.
In other words, traders lose money BECAUSE they are trading their personalities. Every personality trait brings potential assets and liabilities to trading. Sometimes, our personalities pose severe challenges to trading success. Every personality asset, when overutilized, brings its own set of problems.
There is only one source of making money in markets, and that is identifying recurring patterns in market behavior and exploiting those in a manner that provides solid reward relative to risk. We marshal and attenuate various personality traits to identify and exploit those patterns. Success comes, not from indulging our personalities, but from knowing which traits to draw upon and which to work around. That is called wisdom.
In my next post, I'll provide a personal example of trading success that came, not from following my personality, but from properly channeling it.
Further Reading: Trading Psychology for the Experienced Trader
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Friday, January 19, 2007
The Personality of the Trader: How It Affects Performance
A recent pilot study addresses the interesting topic of how a trader's personality affects his or her trading performance. The researchers focused on six personality traits and their impact upon trading:
* Locus of control - The degree to which a trader believes that the ability to be successful is within his or her control;
* Maximizing tendency - The degree to which individuals seek optimum outcomes from their decisions, not just outcomes that meet or exceed expectations;
* Regret susceptibility - The tendency to look back on outcomes of decisions and focus on negative aspects, creating regret;
* Self-monitoring - People's tendency to track and control their own thoughts, feelings, and behaviors;
* Sensation seeking - The degree to which people seek varied and stimulating experience;
* Type A behavior - The degree to which individuals are driven to achieve.
The researchers set up a simulated trading exercise with real money payouts. Because data from only 32 subjects were collected, results must be considered preliminary.
Examining the personality profiles of the participants, the researchers found that the first two traits--locus of control and maximizing tendency--were not related to trading performance. Among the remaining traits, three clusters or personality types emerged:
1) Relaxed, risk-averse traders who avoid regret, dislike sensation-seeking, and show type-B (non achievement oriented) behavior;
2) Traders who were controlled risk takers: high in both self-monitoring and sensation seeking;
3) Achievement-driven traders who showed high Type-A personality traits.
Of the three groups, number three performed the worst. These highly competitive traders were also the most impatient in their decision making, reducing their effectiveness. The first two groups performed similarly--no significant difference. What this suggests is that a relaxed attitude toward performance may be more helpful than a driven one: the highly achievement-driven trader may create his or her own internal noise, interfering with sound decision-making.
Although this is a small study and needs to be followed up with more extensive work, the findings are consistent with other research related to personality and trading performance. In my own study with Andrew Lo and Dmitry Repin of M.I.T., we found that highly emotional reactions to trading outcomes--positive *and* negative--are associated with worse trading performance. The highly driven trader may generate more positive and negative emotional experiences in his or her approach to trading, interfering with clear, calm decisions under conditions of risk and uncertainty. This would fit with research mentioned in my Psychology of Trading book (p. 276), which links stimulation-seeking to high states of emotional arousal. (One of the rationales for the Philip Glass techniques mentioned in that book is the creation of internal states in which stimulation--and hence arousal--are reduced).
The conundrum is that successful traders do tend to be an aggressive, achievement-oriented lot. Up to a certain point, that Type-A tendency works for them, especially if they are able to combine self-monitoring and self-control (the personality trait of conscientiousness) with the desire to take risks. At very high levels of aggressiveness and need-for-achievement, however, the frustrations inherent in working in a setting of high uncertainty may prove overwhelming. I would expect that highly achievement-oriented traders who also have a strong tendency toward negative emotional experience (guilt, anger, depression, anxiety) might experience the worst trading outcomes of all.
The interesting finding of the pilot research summarized above is that group one--the relaxed, risk-averse traders--performed as well as the conscientious risk takers. It may well be the case that clarity of mind--not personality per se--is the most important psychological determinant of good decision making and trading profitability.
* Locus of control - The degree to which a trader believes that the ability to be successful is within his or her control;
* Maximizing tendency - The degree to which individuals seek optimum outcomes from their decisions, not just outcomes that meet or exceed expectations;
* Regret susceptibility - The tendency to look back on outcomes of decisions and focus on negative aspects, creating regret;
* Self-monitoring - People's tendency to track and control their own thoughts, feelings, and behaviors;
* Sensation seeking - The degree to which people seek varied and stimulating experience;
* Type A behavior - The degree to which individuals are driven to achieve.
The researchers set up a simulated trading exercise with real money payouts. Because data from only 32 subjects were collected, results must be considered preliminary.
Examining the personality profiles of the participants, the researchers found that the first two traits--locus of control and maximizing tendency--were not related to trading performance. Among the remaining traits, three clusters or personality types emerged:
1) Relaxed, risk-averse traders who avoid regret, dislike sensation-seeking, and show type-B (non achievement oriented) behavior;
2) Traders who were controlled risk takers: high in both self-monitoring and sensation seeking;
3) Achievement-driven traders who showed high Type-A personality traits.
Of the three groups, number three performed the worst. These highly competitive traders were also the most impatient in their decision making, reducing their effectiveness. The first two groups performed similarly--no significant difference. What this suggests is that a relaxed attitude toward performance may be more helpful than a driven one: the highly achievement-driven trader may create his or her own internal noise, interfering with sound decision-making.
Although this is a small study and needs to be followed up with more extensive work, the findings are consistent with other research related to personality and trading performance. In my own study with Andrew Lo and Dmitry Repin of M.I.T., we found that highly emotional reactions to trading outcomes--positive *and* negative--are associated with worse trading performance. The highly driven trader may generate more positive and negative emotional experiences in his or her approach to trading, interfering with clear, calm decisions under conditions of risk and uncertainty. This would fit with research mentioned in my Psychology of Trading book (p. 276), which links stimulation-seeking to high states of emotional arousal. (One of the rationales for the Philip Glass techniques mentioned in that book is the creation of internal states in which stimulation--and hence arousal--are reduced).
The conundrum is that successful traders do tend to be an aggressive, achievement-oriented lot. Up to a certain point, that Type-A tendency works for them, especially if they are able to combine self-monitoring and self-control (the personality trait of conscientiousness) with the desire to take risks. At very high levels of aggressiveness and need-for-achievement, however, the frustrations inherent in working in a setting of high uncertainty may prove overwhelming. I would expect that highly achievement-oriented traders who also have a strong tendency toward negative emotional experience (guilt, anger, depression, anxiety) might experience the worst trading outcomes of all.
The interesting finding of the pilot research summarized above is that group one--the relaxed, risk-averse traders--performed as well as the conscientious risk takers. It may well be the case that clarity of mind--not personality per se--is the most important psychological determinant of good decision making and trading profitability.
Thursday, July 03, 2014
Hunter S. Thompson, Madness, and Trading
Having an "edge" as a trader: rarely has anything been so frequently discussed and so infrequently demonstrated. We can demonstrate a trader's edge through a long-term, real-time track record of trading; we can demonstrate a strategy's edge through properly constructed backtests. My preference is to trade a strategy that has displayed a historical edge and then let the track record display whether I have an edge in implementing it. Like Hunter once said, it's fine to pray, but row away from the rocks.
Sometimes you don't really know where your edge lies until you go over it. We like to think that trading what fits our personality will provide us with our edge, but that can be a socially acceptable way of justifying a failure to move outside our comfort zone. Indeed, the whole reason psychologists get involved with traders is because trading one's natural predilections tends to mean trading one's perceptual and cognitive biases, acting out one's bad habits in markets, etc.
Getting on stage and imagining your audience consists of animated okra plants is considered crazy. Sitting in front of a screen daily, trading away with no demonstrated edge, and justifying it all by "trading my personality" and "following my plan"...well, that's considered a career.
Admittedly, going over your edge and seeing what lies on the other side is crazy. It's a lack of discipline. It's not trading your plan or being in your zone or beating one's breast with manly pronouncements of conviction. And what if what lies over the edge is *not trading*? Well, perish the thought: that would show a lack of passion for trading, and we all know how necessary that is for market success (and high commissions).
I once decided to play it brutally straight and, in a first meeting with a client, calmly explained that the strategy he was trading was based on randomness and a simple backtest would prove that. That, I suggested--more than any psychological problem--was responsible for his trading woes. Needless to say, the backtest was not requested and neither was my coaching. Throwing bourbon on people's stage curtains is a great strategy for getting yourself ejected from the auditorium.
So what brought all this on?
Let's go out on the lawn and get back to basics.
The time series of any market consists of a linear component and one or more cyclical components. When the linear component is near zero, we have a range-bound market. When the linear component is very strong, we have a trending market. When we have more than one significant cyclical component, we have a noisy, choppy market.
When we see a stable time series, what we're really seeing is consistency of linear and cyclical components. When the world changes in material ways, those components change and we shift from one regime to another. What makes trading so difficult is that the strategies that work well when linear components dominate are not those that work well when cyclical components dominate--and once a strategy works well, a shift of regime can undermine its efficacy.
Trends change their slope; cycles change their frequency and amplitude: it's tough to trade your personality when the market is changing its own. Trading fixed "setups" in changing markets is perhaps a setup in ways that are unintended.
In the current stock market, there is a strong positive linear component (uptrend) and a strong low-frequency cycle superimposed on it. That regime has persisted for some time. In such a regime, my "edge"--short-term trades of 1-3 days based on backtested predictors--has not been a particularly good edge when traded real time. Why? In essence, I'm trading a short-term cycle, when a short-term cycle is not dominant. I'm trading my personality and my predilection, not what the market is giving me. To borrow a phrase from a savvy trading friend, short-term strategies "get run over" when lower frequency cycles and strong trend components are highly dominant.
In other words, my dogma has been run over by my karma.
If I take what the market is giving me, I'd trade a helluva lot less often and align the trades with the most significant components of the present regime. So, I've gone over my edge to see what's on the other side. I'm trading the direction and time frame suggested by the components that account for the lion's share of market movement. That means I'm not daytrading, I'm not swing trading, and I'm not watching screens nearly as much.
I'm just making more money.
Further Reading: Preparing to Win
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Friday, September 26, 2014
Interview With Ted Hayes, Ph.D., Part Three: Identifying Trading Talent
Brett: Based on your research, if you were hiring a trader to manage your money, what is the one personality characteristic you'd most look for? What is the one skill you would most emphasize in your search?
Ted: Picking just one? Brett, this is tough, but overall the right talent development model would select for resilience and nurture conscientiousness. For a senior hire, emotional approach to risk is important and conversely at the junior level I’d be unsurprised to see the overly risk-taking crash — something men do routinely and women do not do. And I say that as a man, so, sorry guys!
Brett: What do you think trading firms could do better in hiring successful traders?
Ted: First, do not try to develop a model to fit a senior trader, especially only one person. Second, think more about a talent model for a successful cohort in your firm maybe more at the junior or mid-level, because that’s who you want more of. Third, assess each hire and develop a talent plan to ensure that person gets the behavioral practice s/he needs. Normally in HR the saying goes that you hire for skills and fire for personality; knowing that, flip the equation - hire for potential and fire for lack of execution. Fourth and finally, trading firms should actively seek out coaches who can work with traders at multiple levels of development.
Brett: Of course, I have to ask the age-old question: Do you think successful traders are made or born? How much of performance is acquired skill and how much is inborn talent?
Ted: Until this year, the reigning model in the psychology of human performance was that high performance was a function of deliberate practice, which is intensive study over thousands of hours — the so-called “10,000 hour rule” — with expert feedback. And while deliberate practice is certainly conducive to high performance, very recent research shows that there is a sort of interaction in that those who already have a high level of talent (cognitive ability, personality, physical) are those who will benefit from deliberate practice. Not just anyone can become a ballerina or chess grand master or “super-trader” just by trying really hard for a long time. It’s a psychological case of the ‘rich getting richer,’ or, life is still unfair. But it’s not all unfair; for example, being really talented and lazy is a recipe for disaster. So the answer is that the potential for successful trading is “born” but the practice of trading mechanics is what makes for high performance. And when people don’t live up to potential after you’ve given them deliberate practice, separation is the fairest melancholy ending of all.
Brett: Thanks very much for participating in this interview. What projects are you working on presently and what are some of the research areas you think are most promising?
Ted: Working with Zolio is rewarding because it’s a great educational opportunity for the participants as well as a trading performance data bonanza. It’s a very smart way for managers to select for results and not for a resume. While Zolio is in its early stages, I’d like to see a more of a playful approach to talent development, recognizing the dynamism of trading. Finally, than you, Brett, for interviewing me — I hope something we’ve discussed sparks interest out there among your reader, and I can’t wait until your new book comes out!
********
Ted has said a lot here. He jokes about the HR saying that people are hired for their skills and fired for their personalities. By flipping that and hiring for personality strengths, a firm can then see who is able to translate those qualities into performance. That is one of the things I like most about Ted's work with Zolio: it's a real-time simulation trading platform that provides feedback about personality and cognitive strengths and that offers continuous feedback to traders about their trading performance. This accomplishes two things: 1) it accelerates a developing trader's learning curve; and 2) it helps traders--and the firms that hire them--see exactly how personality and cognitive strengths translate into promising trading performance. (Zolio also would make a great playground for experienced traders to try out new trading strategies.)
In a broader sense, however, Zolio and Ted are building something even larger: a growing database of personality strengths, cognitive abilities, and trading performance. Over time, this is enabling Ted to unravel patterns of success. For example, it might be the case that successful active daytraders display different patterns of strength than position traders or pairs traders. The database will also uncover the strengths needed at various phases of a trader's development. This is invaluable information both for traders and firms that hire them.
Finally, Ted discusses recent research that suggests that not all performance success can be attributed to hard work and practice. Native talents count for a lot, as well. We are not born as clean slates; from early in life, strengths manifest themselves. Some people are highly social and interactive; others are highly analytical. Some seem hard-wired for faster thinking grounded in pattern recognition; others display an early bent for slower, deeper thinking. The challenge of performance is figuring out who we are and what we're good at and then finding a platform in which we can leverage those talents through deliberate practice to achieve meaningful success. Thanks again to Ted for a most enlightening interview.
Further Reading: Making Peak Performance a Lifestyle
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Wednesday, September 24, 2014
Interview With Ted Hayes, Ph.D., Part Two: A Surprising Finding About the Development of Trading Performance
Brett: What does research tell us about personality traits and performance success?
Ted: The current best model of personality is known as the “big five” factors of personality. This is an approach in which five personality aspects based on adjectives can predict what you’ll do. The five aspects go by the acronym OCEAN: Openness to new experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism (or its opposite, emotional stability). You can find these adjectives in all languages and culture groups.
Conscientiousness predicts work performance in all jobs, thus one should be curious about what it is. Conscientiousness includes planfulness, rule abidance, goal-setting, achievement orientation, and focus on details. In short, it’s self-control. And that is important for many aspects of life where orderliness, hard work, and avoiding distractions is valued. So in trading, especially at the entry levels, we need conscientiousness to help establish and follow routines, attend to details, etc. Traders who aren’t careful to chart assets, make journal entries, etc. are ineffective. Traders who get out of their routines (e.g., after the birth of a child, after illness, after a divorce) need to re-establish them before they can become productive again.
Emotional stability plays out through the more apt term resilience. You will lose money in trading at some point; you will, we hope, have some huge winning positions; there will be days when nothing happens, and there will be days where everything happens seemingly all at once. These events will test you. The capacity to modulate one’s one emotional state, maintain perspective, pull back after surging ahead and pull up when in a spiral — all are aspects of resilience.
A great example of someone with both extraordinary conscientiousness and emotional stability is Charlie Munger, Vice-Chairman of Berkshire Hathaway. Even his boss, Warren Buffet, has expressed his awe at Mr. Munger’s ‘hyper-rationalism.’
Brett: That is very interesting, Ted. It calls to mind the Angela Duckworth research at the University of Pennsylvania. She and her team found that "grit"--resilience in the face of setbacks--and self-control were the two most powerful predictors of success.
Ted: Related to resilience, particularly in trading, is one’s comfort with taking risks (I refer to this as ‘risk tolerance’ though I appreciate that term might be misconstrued). It’s a combination of openness to new experience with emotional stability. In chess, for example, sometimes you sacrifice a knight to take a bishop. In trading you might lose some trades to test out a new market model you’ve developed. Some people prefer the tried and true, and can build a trading approach around that comfort zone. In either case, the extent to which you can come to terms with a balanced approach to risks for the sake of rewards will benefit you and build your own mental Sharpe Ratio.
Extraversion, which refers to being energize by having a broad network of friends and associates, and agreeableness, which refers to the extent to which you seek and create and enjoy harmonious situations, can be important in some careers such as trading in building one’s reputation for trustworthiness and collegiality.
Brett: What I've found is that extraversion and agreeableness very much influence how traders work. More introverted market participants often engage markets via research and study. More extroverted traders are more apt to source ideas via personal contacts, social media, and other interactive means. Some of the most extroverted and agreeable traders I've met have been quite effective working as part of teams. You've conducted a number of research projects concerning traders in financial markets and what makes them successful. What findings have been most interesting and surprising to you?
Ted: The dynamism of trading. You’re competing with and against people world-wide all the time and work in markets beyond your control, and this places extraordinary demands on traders at different points in their psyches.
Trading seems to have multiple levels based on maturity and style. For example, I work with Zolio where we have ‘pre-traders,’ 20- to 28-year olds who are not professionals engaging in trading on a simulated platform. Among them, mechanics and resilience are critical for success, but they’re also on a very steep learning curve. We also see pre-traders overly risk-seeking, with predictable results. Entry-level traders at firms I’ve worked with do better with, again, conscientiousness and resilience. But more senior traders are distinguished by their emotional approach to risk. That’s because these people have survived to that point, but usually they also have a sizable portfolio and it’s about gaining enough returns relative to the leverage and size of one’s positions.
It’s unusual to see different talent models predominate at different points in a career. Again, a very similar dynamic compared to intelligence analysts.
So let's step back for a moment. Ted is saying something extremely important that, to my knowledge, has not been emphasized in the trading psychology literature. "Different talent models predominate at different points in a career." In other words, the traits that make a beginning trader achieve profitability are different from those that make a profitable trader a world-class talent. It is possible to have the skills and traits needed to learn trading and become competent, yet other abilities and qualities may be needed to turn competence into proficiency.
This very much fits with my experience working with traders. Early career traders I worked with in Chicago struggled with issues of discipline (conscientiousness) and taking/growing appropriate risk (resilience). The experienced portfolio managers I've worked with more recently already have developed risk management skills and solid work routines and have demonstrated an ability to take appropriate risk. Their greatest challenge has been adapting to changing market conditions, which Ted would subsume under Openness to new experience.
Each developmental level seems to call upon different success ingredients. In the third and final segment of the interview, Ted will identify some of the implications of his research observations for traders and trading firms.
Further Reading: How Personality Affects Trading Performance
.
Tuesday, April 17, 2007
Trading Mentors and Coaches: A Resource Linkfest
In my recent call for this linkfest, I made the distinction between trading coaches (those helping traders with the emotional aspects of trading performance) and trading mentors (those teaching specific trading methods). Both have their relevance, but it's important to not confuse one with the other. This is why I wrote the post on when coaching works and when it doesn't. Many times, especially among newer traders, the frustrations of trading are simply due to a lack of understanding of markets and the absence of any methods that would confer a consistent edge. No amount of working on the mental game of trading can substitute for the knowledge and skill of the successful professional.
On the other hand, even the best trading methods can be undone by performance anxiety, overconfidence, and a lack of focus and discipline. When it is not possible to become your own trading coach, getting help from an experienced professional can be an excellent choice. Similarly, if you're not finding success in developing your own trading approaches, working with an experienced mentor--one who truly knows and trades markets--can be a great aid to the learning curve.
This linkfest consists of services that have been recommended to me either by the coaches/mentors themselves or by readers. It is not intended to be an exhaustive list, and they are not intended to be my personal recommendations (although I can vouch for a number of people on the list). Please use it as a starting point for your due diligence in selecting the services that will be most helpful to you. For additional resources that I've found useful, please check out the Trader Development page of my personal site and the resource list at the end of my recent book.
TRADING MENTORS
Ray Barros - Ray, based in Singapore and Hong Kong, has thirty years of trading experience and conducts an intensive mentoring course to provide correct tools and and skills for traders. He offers one-to-one teaching that assesses the trader's personality, develops individualized trading plans, and teaches the skills relevant to that plan. Ray has also written extensively on the markets and developed a number of unique technical trading tools that he teaches to traders individually and in seminars. My sense is that Ray takes a personal interest in his students and their success, aiding them in setting and reaching trading goals.
Woodie's CCI Club - Woodie (Ken Wood) has been an icon of trading over the past 29 years. He has pioneered and mastered the trading of patterns of the Commodity Channel Index (CCI), rather than price bars. He has been using a chat room to teach his methods for the past ten years and conducts affordable Trade-A-Long seminars to supplement his teaching. A motto of the site is "traders helping traders", and I've personally found considerable mutual mentorship on the site. To his credit, Woodie has used the site to raise over $80,000 for charities.
DLC Profiles - Jim Dalton and Terry Liberman provide individualized and small group learning experiences grounded in Market Profile. They emphasize the entire cognitive process of learning--perception, intuition, and reason--and stress the role of study and practice in the development of mastery. Jim is one of the pioneers of Market Profile, with considerable trading and industry experience. Terry is a developer of innovative Market Profile software (WINdoTRADEr) that facilitates volume analysis within profiles of varying time frames. They also offer a newsletter, articles, and Webinars to support the education.
Linda Bradford Raschke - Linda, one of Jack Schwager's Market Wizards, has been conducting chat-room based education for years. She currently maintains two rooms: one devoted to futures, the other to stocks. I've known Linda for years and have been impressed with her integration of trading psychology into her teaching of trading methods. She also offers basic online services that illustrate setups, provide proprietary scans, and enable access to the transcripts of the daily chat room sessions. Guest educators provide supplementary learning experiences.
Alexander Trading - Joe Mertes and Tom Alexander direct a one-on-one mentoring program that lasts 12 months. The core methodology of the instruction is Market Profile, with an emphasis upon identifying trade location for optimal reward-to-risk opportunities. The instructors, with over twenty years of trading experience each, actively trade their own accounts and have started a fund for accredited investors. They also offer newsletters and conduct educational seminars and Webinars.
Daytrade Team - Founders Landon and Andy Swan and Head Trader Nick Fenton offer subscribers real-time alerts of trading setups, as well as an online trading room. A variety of alert systems are offered, including ones for daytrading, swing trading, and options trading. The online trading room provides real-time commentary and trading, with integrated chat from members. Andy Swan has his own blog and has been trading actively for over 10 years. He's currently developing a new venture: mytrade.com.
Trade Mentor - Bob Lang and Price Headley provide mentoring in such areas as charting techniques, trend identification, and specific trading strategies for options and futures. They also cover trading psychology topics, such as journaling and maintaining discipline. Their mentoring is available on a one-to-one basis through phone consultation and in-house instruction.
TRADING COACHES
Doug Hirschhorn - Doug holds a Ph.D. in psychology, with a specialization in sport psychology. He is co-author of the book The Trading Athlete: Winning the Mental Game of Trading and has extensive experience working with traders in proprietary trading firm and hedge fund settings. He is also a regular columnist for Trader Monthly magazine. Doug works with traders to help them modify destructive trading behaviors in both focus group and one-to-one formats. He also offers seminars, Webinars, and digital downloads. Doug has an impressive bio and I've been proud to work with him in several settings.
Trader Psyches - Denise Shull leads a consulting firm in the arena of trader and trading psychology, teaching traders to deal with impulsivity. The programs, including self-directed workshops and advanced coaching, are based on a systematic approach to the reciprocal relationship between reason, analysis, emotion, and trading results. Two consulting modern psychoanalysts, Dr. Gene Kalin and Dr. Deborah Greene Bershatsky, assist in client coaching through a theory and approach distinctly different from Freudian psychoanalysis.
John Forman - John brings a history as an athletic coach to his work with traders. He also has a strong background in trader education through his role as editor with the Trade2Win site and through his book The Essentials of Trading. John writes a trading education blog and offers coaching services to traders. His emphasis is two-fold: education (helping traders understand the ins-and-outs of markets) and development (helping traders identify the trading approaches best suited to them to develop a comprehensive trading plan). In addition to individual coaching, he offers trading courses through his site.
Dr. Janice Dorn - Dr. Dorn brings a background as a trader and as a physician to her coaching work. She conducts personal and group coaching, as well as live and Web presentations. Her website offers free articles and updates. Dr. Dorn also publishes a newsletter that deals with trading and behavioral neurofinance.
One last piece of advice: With the exception of Woodie's club, these services are offered on a commercial basis and many are not cheap. Traders, especially newbies, need to keep a close eye on their overhead. Investigate before you invest your time and money in these resources; get details, references, and concrete indications that the services will specifically address your interests and needs. A service is only a resource if it offers what you're looking for.
On the other hand, even the best trading methods can be undone by performance anxiety, overconfidence, and a lack of focus and discipline. When it is not possible to become your own trading coach, getting help from an experienced professional can be an excellent choice. Similarly, if you're not finding success in developing your own trading approaches, working with an experienced mentor--one who truly knows and trades markets--can be a great aid to the learning curve.
This linkfest consists of services that have been recommended to me either by the coaches/mentors themselves or by readers. It is not intended to be an exhaustive list, and they are not intended to be my personal recommendations (although I can vouch for a number of people on the list). Please use it as a starting point for your due diligence in selecting the services that will be most helpful to you. For additional resources that I've found useful, please check out the Trader Development page of my personal site and the resource list at the end of my recent book.
TRADING MENTORS
Ray Barros - Ray, based in Singapore and Hong Kong, has thirty years of trading experience and conducts an intensive mentoring course to provide correct tools and and skills for traders. He offers one-to-one teaching that assesses the trader's personality, develops individualized trading plans, and teaches the skills relevant to that plan. Ray has also written extensively on the markets and developed a number of unique technical trading tools that he teaches to traders individually and in seminars. My sense is that Ray takes a personal interest in his students and their success, aiding them in setting and reaching trading goals.
Woodie's CCI Club - Woodie (Ken Wood) has been an icon of trading over the past 29 years. He has pioneered and mastered the trading of patterns of the Commodity Channel Index (CCI), rather than price bars. He has been using a chat room to teach his methods for the past ten years and conducts affordable Trade-A-Long seminars to supplement his teaching. A motto of the site is "traders helping traders", and I've personally found considerable mutual mentorship on the site. To his credit, Woodie has used the site to raise over $80,000 for charities.
DLC Profiles - Jim Dalton and Terry Liberman provide individualized and small group learning experiences grounded in Market Profile. They emphasize the entire cognitive process of learning--perception, intuition, and reason--and stress the role of study and practice in the development of mastery. Jim is one of the pioneers of Market Profile, with considerable trading and industry experience. Terry is a developer of innovative Market Profile software (WINdoTRADEr) that facilitates volume analysis within profiles of varying time frames. They also offer a newsletter, articles, and Webinars to support the education.
Linda Bradford Raschke - Linda, one of Jack Schwager's Market Wizards, has been conducting chat-room based education for years. She currently maintains two rooms: one devoted to futures, the other to stocks. I've known Linda for years and have been impressed with her integration of trading psychology into her teaching of trading methods. She also offers basic online services that illustrate setups, provide proprietary scans, and enable access to the transcripts of the daily chat room sessions. Guest educators provide supplementary learning experiences.
Alexander Trading - Joe Mertes and Tom Alexander direct a one-on-one mentoring program that lasts 12 months. The core methodology of the instruction is Market Profile, with an emphasis upon identifying trade location for optimal reward-to-risk opportunities. The instructors, with over twenty years of trading experience each, actively trade their own accounts and have started a fund for accredited investors. They also offer newsletters and conduct educational seminars and Webinars.
Daytrade Team - Founders Landon and Andy Swan and Head Trader Nick Fenton offer subscribers real-time alerts of trading setups, as well as an online trading room. A variety of alert systems are offered, including ones for daytrading, swing trading, and options trading. The online trading room provides real-time commentary and trading, with integrated chat from members. Andy Swan has his own blog and has been trading actively for over 10 years. He's currently developing a new venture: mytrade.com.
Trade Mentor - Bob Lang and Price Headley provide mentoring in such areas as charting techniques, trend identification, and specific trading strategies for options and futures. They also cover trading psychology topics, such as journaling and maintaining discipline. Their mentoring is available on a one-to-one basis through phone consultation and in-house instruction.
TRADING COACHES
Doug Hirschhorn - Doug holds a Ph.D. in psychology, with a specialization in sport psychology. He is co-author of the book The Trading Athlete: Winning the Mental Game of Trading and has extensive experience working with traders in proprietary trading firm and hedge fund settings. He is also a regular columnist for Trader Monthly magazine. Doug works with traders to help them modify destructive trading behaviors in both focus group and one-to-one formats. He also offers seminars, Webinars, and digital downloads. Doug has an impressive bio and I've been proud to work with him in several settings.
Trader Psyches - Denise Shull leads a consulting firm in the arena of trader and trading psychology, teaching traders to deal with impulsivity. The programs, including self-directed workshops and advanced coaching, are based on a systematic approach to the reciprocal relationship between reason, analysis, emotion, and trading results. Two consulting modern psychoanalysts, Dr. Gene Kalin and Dr. Deborah Greene Bershatsky, assist in client coaching through a theory and approach distinctly different from Freudian psychoanalysis.
John Forman - John brings a history as an athletic coach to his work with traders. He also has a strong background in trader education through his role as editor with the Trade2Win site and through his book The Essentials of Trading. John writes a trading education blog and offers coaching services to traders. His emphasis is two-fold: education (helping traders understand the ins-and-outs of markets) and development (helping traders identify the trading approaches best suited to them to develop a comprehensive trading plan). In addition to individual coaching, he offers trading courses through his site.
Dr. Janice Dorn - Dr. Dorn brings a background as a trader and as a physician to her coaching work. She conducts personal and group coaching, as well as live and Web presentations. Her website offers free articles and updates. Dr. Dorn also publishes a newsletter that deals with trading and behavioral neurofinance.
One last piece of advice: With the exception of Woodie's club, these services are offered on a commercial basis and many are not cheap. Traders, especially newbies, need to keep a close eye on their overhead. Investigate before you invest your time and money in these resources; get details, references, and concrete indications that the services will specifically address your interests and needs. A service is only a resource if it offers what you're looking for.
Friday, October 31, 2025
What To Do When Your Trading Is Successful
11/5/2025 - The most important thing to look for in teaming up with another successful trader in a pod is complementary strengths. You want to be similar in personality, but different in what you're good at. Ideally, someone you team up with is strong in areas where you are not, and you are strong in areas that they are not. That can take different forms. You might be strong trading one market, and they might specialize and experience success in a different market. You might be strong trading longer time frames, and they might find success in short-term trading. You might succeed trading stocks directionally; they might succeed trading options structures.
In such an arrangement, clicking in terms of personality makes it easy for each of you to learn from the other. They mentor you, and you mentor them. You share ideas, and you share learning lessons. Each of you expands your success.
Once you can create a two-person pod, then you might think about bringing on a third and fourth person who you both like and respect and who excels in areas of trading different from what the two of you do. That way, you continue the structure of learning from/with each other and expanding your trading. Reviewing market opportunity at the start of each day and reviewing performance at the end of each day creates many opportunities of "each one teach one".
Great things can happen when each person is a mentor and each person is a student and you challenge/inspire one another to grow. Trading psychology is not just about managing negative emotions and behaviors. When you create the right team, you cultivate the right mindset.
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11/4/2025 - Moving from individual, isolated trading to trading with one or more dedicated traders in a "pod" is an important path toward our growth as traders. At some point in a successful trader's development, adding size--doing more of the same thing--is not a formula for success. That would be like being a business that has one profitable product and just keeps making more and more of it.
Eventually successful traders get to the point where getting bigger means getting broader. By doing more and different things with an edge, the individual trader becomes a portfolio. The diversification of strategies and styles ensures that there can be success across different market environments.
When we trade with others in a pod, we learn from them and that sparks our ability to get bigger by getting broader. As the pod grows, we connect with more mentors--and we also mentor more peers. That expands our market mastery, and it also cements our learning.
A true measure of success is the ability to sustain profitability across different market conditions. That can only happen if our trading is as diverse and flexible as markets are. In teaching others and learning from them, collaboration makes everyone better.
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11/3/2025 - Once your trading is profitable, the single most important thing you can do is seek out other profitable traders, network with them, and share ideas and experiences. This is the first stage of teamwork. At every successful professional trading firm where I work, trading is conducted in teams. The sharing of ideas and mutual mentoring accelerates everyone's development and supports their trading. The trading events you attend and the traders you follow on social media are opportunities to reach out to other participants and network. It may take a while, but finding just one or two others willing to share ideas and experiences is a great start toward accelerated growth.
Ultimately, when you find those like-minded colleagues, you'll want to consider creating a formal trading pod, where you become a small group with its own processes and mutual learning. There is no reason learning and development have to be undertaken in isolation. Once you've been successful on your own, your growth has only just begun. The key is to team up with others who are similar enough in values and personality but different enough in markets and strategies traded that you can learn from one another.
The step from individual, isolated trader to pod member is often the most promising step in building a sustainable trading business. Learning with others accelerates everyone's development.
=======================
11/2/2025 - Very often, there is an intermediate phase of development in which some of your trading is successful and some is not. This is not at all necessarily because of changes in our trading psychology. Rather, markets change in their direction, volatility, and correlation to other markets, ensuring that any given approach will work some of the time and not at other times.
If your trading has been profitable, but marked with losing periods, the best practice is to isolate those losing periods and see what might make them different than the winning periods. It's possible that the losing periods were periods of greater distraction in your personal life; it's also possible that the losing periods were choppier or more volatile than the winning periods. Reverse engineering periods of loss is the first step in figuring out how to adapt.
The other helpful exercise is to reverse engineer the greatest winning periods and see what you might have been doing differently and what markets were doing at that time. Often, this review will tell you when you're in your sweet spot, enabling you to grow your risk-taking. For example, my recent trading reviews showed that when I began by identifying markets that were stretched on a short-term basis and then identifying how their movement lined up with their behavior on the longer time frame, I was often successful in figuring out how the shorter and longer perspectives lined up. If I started with the big picture and (prematurely) developed a directional opinion, that was when I did my worst trading.
Learning from your successes fuels your positive psychology and provides the confidence to size up your trades. As I emphasized in my book, the goal is to turn your best practices into sustainable processes.
=====================
* Are returns positive over a sufficient period to cover various market conditions? Does the trader earn significantly more than the risk-free returns of government bonds?
* Does the trader demonstrate good risk-adjusted returns (as measured by such indicators as Sharpe ratio)? Is the average/median size of winning trades greater than the average/median size of losers? Good risk-adjusted returns can be a great initial sign of a disciplined trading process.
* Does the trader demonstrate the ability to make money in different kinds of markets and in different kinds of ways? Such diversification tells us something about a trader's adaptability. It's great to make money in one kind of market, but rarely is that a sustainable business.
* Has the trader evolved in recent years? How have they grown? A trader who demonstrates ongoing improvement and growth is more likely to adapt to future market changes.
* Does the trader demonstrate a positive trading psychology, finding both joy and meaning in trading and rising to challenges through innovation and teamwork?
The above are useful criteria in assessing your progress and success as a trader. If you are firing on many of these cylinders, it is worth asking the solution-focused question: What have I been doing right? How have I been able to make progress as a trader? So often, future success comes from leveraging what we do best. More to come!
Wednesday, September 24, 2008
Personality Traits and Trading Success
The research of Costa and McCrae suggests that personality traits fall into five broad categories, with each category displaying a number of facets. Their NEO-PI personality trait inventory labels these categories and facets as follows:
* Neuroticism - Anxiety, Angry Hostility, Depression, Self-Consciousness, Impulsiveness, and Vulnerability;
* Extraversion - Warmth, Gregariousness, Assertiveness, Activity, Excitement-Seeking, Positive Emotions;
* Openness - Fantasy, Aesthetics, Feelings, Actions, Ideas, Values;
* Agreeableness - Trust, Straightforwardness, Altruism, Compliance, Modesty, and Tender-Mindedness;
* Conscientiousness - Competence, Order, Dutifulness, Achievement Striving, Self-Discipline, and Deliberation.
I commonly hear questions about which personality traits distinguish successful traders. My leaning is to question the premise; success in trading is probably far more related to talents, skills, and effort than personality features. That having been said, it's no doubt the case that certain traits tend to help people make best use of their talents and skills in particular vocations.
One interesting case in point came from research that I conducted quite a few years ago. The literature had found that stereotypical masculine sex role traits (assertiveness, achievement-orientation) were more associated with happiness and success than stereotypical feminine sex role traits (caring, warmth, nurturance). I wondered if this was perhaps an artifact: since most research subjects in these studies were hapless Psych 101 students fulfilling their requirements, perhaps the findings were telling us more about what was successful in their academic worlds than in the world in general.
I repeated the studies but used subjects who attended a college of nursing. Sure enough, feminine sex roles were more associated with happiness and success in that population. It's not the personality trait, but the fit between the trait and one's environmental and work demands, that accounts for success. In the military, one set of personality traits might characterize success; in the worlds of sales, trading, or psychotherapy, we'd expect to see different traits come to the fore.
Similarly, different styles of trading--from market making in the pit and scalping to longer-term investing and pairs/spread trading--might be associated with different personality trait correlates of success. The search for a single set of traits to predict success is unlikely to bear fruit. In my next post, I'll offer a short personality self-assessment and discuss how the results might be related to trading success in various financial settings and strategies.
RELATED POST:
Assessing Trader Personality
.
* Neuroticism - Anxiety, Angry Hostility, Depression, Self-Consciousness, Impulsiveness, and Vulnerability;
* Extraversion - Warmth, Gregariousness, Assertiveness, Activity, Excitement-Seeking, Positive Emotions;
* Openness - Fantasy, Aesthetics, Feelings, Actions, Ideas, Values;
* Agreeableness - Trust, Straightforwardness, Altruism, Compliance, Modesty, and Tender-Mindedness;
* Conscientiousness - Competence, Order, Dutifulness, Achievement Striving, Self-Discipline, and Deliberation.
I commonly hear questions about which personality traits distinguish successful traders. My leaning is to question the premise; success in trading is probably far more related to talents, skills, and effort than personality features. That having been said, it's no doubt the case that certain traits tend to help people make best use of their talents and skills in particular vocations.
One interesting case in point came from research that I conducted quite a few years ago. The literature had found that stereotypical masculine sex role traits (assertiveness, achievement-orientation) were more associated with happiness and success than stereotypical feminine sex role traits (caring, warmth, nurturance). I wondered if this was perhaps an artifact: since most research subjects in these studies were hapless Psych 101 students fulfilling their requirements, perhaps the findings were telling us more about what was successful in their academic worlds than in the world in general.
I repeated the studies but used subjects who attended a college of nursing. Sure enough, feminine sex roles were more associated with happiness and success in that population. It's not the personality trait, but the fit between the trait and one's environmental and work demands, that accounts for success. In the military, one set of personality traits might characterize success; in the worlds of sales, trading, or psychotherapy, we'd expect to see different traits come to the fore.
Similarly, different styles of trading--from market making in the pit and scalping to longer-term investing and pairs/spread trading--might be associated with different personality trait correlates of success. The search for a single set of traits to predict success is unlikely to bear fruit. In my next post, I'll offer a short personality self-assessment and discuss how the results might be related to trading success in various financial settings and strategies.
RELATED POST:
Assessing Trader Personality
.
Saturday, November 03, 2007
What Stresses Traders Out?
There are stresses inherent to trading, as with any high risk/high reward activity, as fighter pilots, brain surgeons, and poker champions can attest. But not all trader stresses are trading related; understanding *why* you're stressed is an important first step in ensuring that work demands don't interfere with performance.
Here are some of the most common sources of trader stress:
1) Excessive risk-taking: Traders who overtrade (trade more frequently than opportunity dictates and trade larger size than is prudent for their accounts) create volatility of returns, which enhances emotional volatility. By creating large drawdowns during slump periods and by ignoring stop loss rules (per trade, per day), traders generate stress through their poor trading practices. A great stress buster for these situations is to make good trading practices as rule-like as possible. By writing out rules and mentally rehearsing them (with imagery, self suggestions), traders can turn good trading behaviors into positive habit patterns.
2) Changing markets: When markets shift their behavior, becoming more or less volatile and changing their direction, traders' ideas can stop working. This creates potential frustration, as well as losses. It can also lead to temporary feelings of loss of control and confusion. Psychological research suggests that perceptions of control are important mediators of stress levels. Here is where it's very helpful to stay on top of your performance statistics and quickly recognize when your trading is deviating from its norm in a negative way. That can serve as a cue to cut your size, focus your attention on what *is* working for you, and build upon your strengths.
3) Unrealistic expectations: Another way traders can generate their own stress is by holding themselves to perfectionistic standards that they can't possibly reach. No one consistently buys the lows and sells the highs; that means it's always possible to focus on the money left on the table. Such rigid perfectionism turns winning traders into psychological failure experiences, generating frustration, negative self-talk, and stress. Cognitive techniques, such as those outlined in my book on trader performance, can be very helpful in learning how to turn negative thought patterns into constructive ones.
4) Personality patterns: Sometimes the trader's stress is part of a larger constellation of personality patterns that yield stress in other areas of life as well. For example, a trader may have a biological tendency toward depression, expressing itself through negative thinking and problems in concentrating. Similarly, anxiety disorders can manifest themselves in trading--excessive worry, catastrophizing--but also in such other areas as relationships and work. When stress patterns occur across life spheres, getting an evaluation from a professional is important. Not all problems that affect trading are trading problems.
5) Real life challenges: Stress can be a perfectly appropriate response to objective life challenges. When a trader is facing family or personal illness, relationship problems, or budget crises, these can easily intrude into decision making. The worst thing traders can do in these situations is try to put the problems out of their head. Rather, setting time aside to face the challenges directly, developing ways of dealing with them, and finding effective supports is the best way to ensure that realistic stress does not become overwhelming distress.
In short, it's helpful to diagnose when stress problems are coming from trading and markets and when they're coming from our own personality patterns.
A forthcoming book that is helpful in describing and illustrating (with multiple, helpful case studies) the varieties of stress that affect traders is the volume Mastering Trading Stress by Ari Kiev. Dr. Kiev covers such topics as the effects of fear on performance; risk management; and personality patterns that contribute to stress. It's a clearly written, well-organized, and concise volume--one of the very few practical resources on the topic.
As I've emphasized in past posts, however, stress--while vitally important--is only half of a larger emotional equation. The other side of that equation is emotional well-being. One of the greatest protections against stress and distress are life activities that bring joy, contentment, energy, and affection. The absence of positive emotional experience can be as corrosive to performance as an excess of stress.
RELEVANT POSTS:
Why Well-Being is Important for Traders
Transforming Stress Into Well-Being
A Personality Questionnaire for Traders
.
Here are some of the most common sources of trader stress:
1) Excessive risk-taking: Traders who overtrade (trade more frequently than opportunity dictates and trade larger size than is prudent for their accounts) create volatility of returns, which enhances emotional volatility. By creating large drawdowns during slump periods and by ignoring stop loss rules (per trade, per day), traders generate stress through their poor trading practices. A great stress buster for these situations is to make good trading practices as rule-like as possible. By writing out rules and mentally rehearsing them (with imagery, self suggestions), traders can turn good trading behaviors into positive habit patterns.
2) Changing markets: When markets shift their behavior, becoming more or less volatile and changing their direction, traders' ideas can stop working. This creates potential frustration, as well as losses. It can also lead to temporary feelings of loss of control and confusion. Psychological research suggests that perceptions of control are important mediators of stress levels. Here is where it's very helpful to stay on top of your performance statistics and quickly recognize when your trading is deviating from its norm in a negative way. That can serve as a cue to cut your size, focus your attention on what *is* working for you, and build upon your strengths.
3) Unrealistic expectations: Another way traders can generate their own stress is by holding themselves to perfectionistic standards that they can't possibly reach. No one consistently buys the lows and sells the highs; that means it's always possible to focus on the money left on the table. Such rigid perfectionism turns winning traders into psychological failure experiences, generating frustration, negative self-talk, and stress. Cognitive techniques, such as those outlined in my book on trader performance, can be very helpful in learning how to turn negative thought patterns into constructive ones.
4) Personality patterns: Sometimes the trader's stress is part of a larger constellation of personality patterns that yield stress in other areas of life as well. For example, a trader may have a biological tendency toward depression, expressing itself through negative thinking and problems in concentrating. Similarly, anxiety disorders can manifest themselves in trading--excessive worry, catastrophizing--but also in such other areas as relationships and work. When stress patterns occur across life spheres, getting an evaluation from a professional is important. Not all problems that affect trading are trading problems.
5) Real life challenges: Stress can be a perfectly appropriate response to objective life challenges. When a trader is facing family or personal illness, relationship problems, or budget crises, these can easily intrude into decision making. The worst thing traders can do in these situations is try to put the problems out of their head. Rather, setting time aside to face the challenges directly, developing ways of dealing with them, and finding effective supports is the best way to ensure that realistic stress does not become overwhelming distress.
In short, it's helpful to diagnose when stress problems are coming from trading and markets and when they're coming from our own personality patterns.
A forthcoming book that is helpful in describing and illustrating (with multiple, helpful case studies) the varieties of stress that affect traders is the volume Mastering Trading Stress by Ari Kiev. Dr. Kiev covers such topics as the effects of fear on performance; risk management; and personality patterns that contribute to stress. It's a clearly written, well-organized, and concise volume--one of the very few practical resources on the topic.
As I've emphasized in past posts, however, stress--while vitally important--is only half of a larger emotional equation. The other side of that equation is emotional well-being. One of the greatest protections against stress and distress are life activities that bring joy, contentment, energy, and affection. The absence of positive emotional experience can be as corrosive to performance as an excess of stress.
RELEVANT POSTS:
Why Well-Being is Important for Traders
Transforming Stress Into Well-Being
A Personality Questionnaire for Traders
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Monday, June 04, 2007
Trading Discipline: Cause of Problems or Effect?
Among the dozens of submissions for the Trading Coach Project, the issue of discipline--sticking to plans/stops--was far and away the most common problem reported by traders. My general experience is that lapses of discipline are usually the result of a problem, not a cause. A key challenge, then, for work on oneself is identifying the cause of the departures from prudent trading.
RELATED POSTS:
Top Reasons Traders Lose Their Discipline
Understanding Lapses in Trader Discipline
Controlling Emotions is Not the Goal of Trading Psychology
There are three frequent causes worth investigating:
1) Personality Traits - Some people score low on a trait called Conscientiousness. They do not plan and follow through well, and they can be impulsive. This, of course, can manifest itself as a problem with discipline in trading. The key to identifying whether or not personality is a cause of discipline problems is determining whether a similar loss of discipline occurs in other facets of life (outside trading). If a person is disorganized and lacking in conscientiousness in their work, social relations, personal finances, etc., then it makes sense that this trait would carry over to their trading. Such individuals frequently need external brakes on their trading, such as risk managers at a firm who will enforce a "drop dead" level (and prevent further trading) once a loss limit is hit. Individual traders with impulsivity and low conscientiousness benefit from very explicit, structured rules that they follow without variation and reinforce with mental rehearsals. If the lack of discipline is so great that even such rules and rehearsals can't work, I personally do not believe such individuals should be trading. This includes traders with clearly addictive patterns of behavior, both in their trading and in other facets of their lives.
2) Market Volatility - Many, many times traders are quite conscientious and self-controlled in most areas of their lives, but experience lapses of discipline specific to trading. When this happens, it's often the case that the trading itself--*how* they're trading--is artificially creating the failure to follow trading rules. A key culprit in all this is market volatility. Volatility changes from day to day and week to week. It also varies as a function of time of day. Frequently, traders trade a fixed size and set fixed targets and stops, heedless of the underlying market volatility. In a low volatility environment, they fail to hit their targets and get stopped out, criticizing themselves for leaving money on the table. In an environment of enhanced volatility, the market will blow through their stops or exceed their targets, leaving them feeling that they did not trade well. This is especially true when traders find themselves unable to take what is normal heat in an environment of raised volatility. In such cases, it really isn't a lapse of discipline causing the problem. Rather, the trader is not adapting to market conditions. Adhering to fixed rules in a variable environment is not necessarily a virtue. Changing markets can prevent us from enacting those fixed rules.
3) Position Sizing - It is very common that smaller traders or aggressive traders will see a good trade and place too large a bet (i.e., a bet that is large relative to their account size). This makes it difficult to ride out normal movements against the position and leads to frustration and emotional arousal that result in loss of discipline. A good way of determining whether or not this is the case is to compare your largest trades with your smaller ones. If discipline problems tend to occur on the largest positions, you know that the increased perceptions of risk are interfering with consistency. The answer to this problem is to size all positions in such a way that individual losses in a trade cannot prevent you from making money on the day; losses during a day won't prevent you from being green on the week. Large trades relative to position size run the risk of ruin: a series of losing trades can dig a monstrous hole for the trader and cause significant emotional damage. In a sense, trades should be boring--not so large as to create undue fear *or* excitement. It is easiest being consistent and maintaining discipline when those emotional factors don't kick in.
It is common for trading psychologists to emphasize that our psyches affect our trading. Equally true, however, our trading affects our emotions. Trading inflexible strategies with inflexible targets and stops; trading size that is too large for our personal risk tolerance and account sizes: both of these can create "discipline" problems even for conscientious traders. Trading well is often the best psychological strategy of all.
RELATED POSTS:
Top Reasons Traders Lose Their Discipline
Understanding Lapses in Trader Discipline
Controlling Emotions is Not the Goal of Trading Psychology
Tuesday, September 23, 2014
Interview With Ted Hayes, Ph.D., Part One: The Two Drivers of Elite Performance
Ted is also an Adjunct Assistant Professor of Organizational Sciences at George Washington University and has served as a Senior Research Director for the Gallup Organization. My interview with Ted will be in several installments, as he had a great deal to share.
Brett: Hi, Ted. Perhaps you can tell readers a little bit about yourself and your areas of interest as a researcher and psychologist.
Ted: Sure, thanks for this conversation Brett! My name is Ted Hayes and I am a research psychologist based in Northern Virginia. My interests are in the nature of human performance, especially among higher performing people. The one question I want to answer is, what is it that makes people successful?
My first internship was to help study predictors of success for U.S. Navy Explosive Ordinance Disposal divers. Talk about a high-stakes environment! And in that study we found that measurable aspects of personality predicted training success. I was hooked on psychological measurement from then on.
Performance among traders is different from performance among EOD divers but the same types of human performance attributes are linked to positive outcomes. That’s one of the exciting parts of my work.
Brett: What are some of the most important factors that determine a person's satisfaction and performance in a career field?
Ted: I’ll start by defining some terms to ensure that we (you, me, the readers of your blog) have a common frame of reference.
Vocational interests are expressions of what an individual finds rewarding in terms of social interaction, external rewards (i.e. remuneration) and social status, and a sense of personal meaning. For example, many people go into finance or trading because they like the potential for high income; an example would be Charles Schwab. The same type of people, interestingly, would make great intelligence analysts, and in fact the traders and intelligence analysts I’ve worked with have very similar talent sets. But while the money certainly could and should be a factor in vocational choice, you, Brett, have written about how trading involves ‘the rage to master’ — I love that term. So one could find trading to be a rewarding career because of the desire for high income but maybe you’ll be happier longer term because you want to understand markets, enjoy being the master of your own fate, find satisfaction in calculating the right risk ratios.
In short, you will be happy in a field if you understand your motivations and then are able to match your motivations to an environment that will reward those motivations. Day traders might be more at one point of the scale while prop-desk traders at banks would be at another point. Both groups would be trading but possibly for different reasons, so satisfaction is a personal sense of accomplishment based on understanding what makes you ‘tick.’
Brett: So what you're happy with and what you do well could be different things.
Ted: Yes, performance is very different from satisfaction. For example, if you want to run a macro fund but you’re starting out in day trading, well, that won’t last long. So that’s why from a research perspective we expand the toolkit beyond vocational interests to measure the psychology of human performance.
Over 100 years of world-wide professionally conducted empirical research on human performance, combined with a few more decades of study on human cognition, could be summarized as follows:
Cognitive ability enables one to make sense of data, integrate new information with previously learned information, and retrieve information to create new work products. But before your readers with perfect SAT scores or A-level exams start congratulating themselves, let’s acknowledge that being among “the smartest guys in the room” doesn’t mean you’ll be successful; just look at what high IQ did for Enron. And as you and I know from our work with traders, a lot of successful traders think people with academic smarts are, well, stupid. What distinguishes “smart” from “successful” is good decision-making. So the question is, why and how do people make good decisions?
Two completely different strains of psychology converge to address making good decisions. First, research and thinking in cognitive psychology has converged on the two-stage model for judgment and decision making — as Daniel Kahneman puts it in his book’s title, “Thinking, Fast and Slow.” The Canadian psychologist Keith Stanovich also poses a two-stage model of rationality in which there are snap (‘fast’) decisions, which are prone to bias and heuristics, and deliberate (‘slow’) decisions, which in theory are based on data, subject to de-biasing, and ultimately more “rational.”
Brett: So performance is tied to our abilities to process information.
Ted: Yes, but this is only part of the picture. One could ask, do people really only make judgments based on data and algorithms? Of course not. Deliberations and decisions reflect our tendencies, preferences, allegiances, anxieties, values, biases, temperament, and motives, or, in other words, our personalities.
Personality drives behavior, especially in work settings. World-wide empirical research over the span of 100 years has settled this issue at least to that extent.
Personality reflects your interests, temperament, values, etc. as filtered by your social skills. In other words, your reputation is a proxy for your personality. In fact current research shows that other people’s ratings of you on personality tests are better predictors of your work performance than are your own personality test ratings of yourself.
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Let's step back for a moment and reflect on what Ted is proposing. He is identifying two broad factors that contribute to performance: cognitive ability and personality. Both are crucially involved in decision-making. Cognitive ability breaks down into fast thinking--the kind of pattern recognition we see among successful short-term traders--and slow, deep thinking. That's the kind of analysis that we see among global macro portfolio managers. It is difficult to imagine that a trader can be successful without having at least one of those areas well-developed.
On the other hand, all the skills and knowledge in the world will not translate into performance if those cognitive assets are not supported by personality traits. As Ted points out, we all know very smart people who are not top level performers--in markets or elsewhere. It is the ability of personality traits to channel cognitive ability that contributes to world class performance.
In the next segment of the interview, Ted will shed light on the specific personality traits that are associated with performance success.
Further Reading: The Best Predictor of Trading Success
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