Are You Trading the Wrong System for Your Personality?

· 9 min read
Are You Trading the Wrong System for Your Personality?

Square Peg Round Hole

I am in the middle of a book by Brett Steenbarger, someone I originally wrote off as his book "The Psychology of Trading" seemed very theoretical and abstract. I felt it was a psychologist talking about traders and not a trader who understood psychology.

Anyhow - I decided to give him another try and picked up his book "Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology". I quite honestly could not put it down. One of the points emphasized in his writings centered around aligning skills with capability to develop competence. Oddly enough, something I seldom considered in my own trading.

It stuck me as simple but understated. How many traders are really leveraging their personal and emotional makeup to trade a strategy that fits... themselves? Also, how many traders are pushing a boulder up a mountain and totally unaware of their own impending doom?

Another pertinent point in his book was how few traders have actually taken the time to experiment with different trading styles. This is probably one of the most challenging things to pursue in trading and why it can take years to find something that gets you into a "flow state". Just like in athletics we wouldn't expect a midget to win the high jump - turns out, our genetic code is a thing.

A Pit of Fallacies

It's easy to fall into the fallacy that we can achieve anything irrespective of our psychological and genetic makeup. What This is why the trading industry is so insidious. Seldom do people question the advocacy of a perfect system and we emotionalize money or make it personal.

Everyone I talk to always tells me about the upside. People seldom reflect on the advocacy of a system, ever fewer back test them consistently.

I have tried so many strategies that it would make your head spin. Some have worked, some have been outright scams. It took me a while to relinquish my need to be "right" all the time and cut losses. In fact, this is something that burns most traders. We keep plugging away snorting lines of hopium, that big win however is always "just around the corner". If this sounds like gambling addiction... well...

It wasn't until I brushed off an old folder that was stored away in the depths of my attic and laughed at the old psychometric evaluation results I did over the years. The caveat of course that these are tools not defined ways of being, an important distinction. I took a few evals with work recently as well and little had changed.

How my Own Psychological Make-up and Strengths Shaped my Trading

I hate to admit that being a quantitative genius was never my forte. In fact, during my Engineering Degrees, math used to kick my ass and almost left me feeling I would be bad at everything. This of course is another entire conversation, the same educational institutions should try to embody the axiom:

I kept trying out complicated options strategies and sophisticated indicators thinking that the mathematical edge I would gather from these tools would really be my road to wealth. Although this may be the road to wealth for others, I would lose interest and seldom followed my rules with rigor. It just didn't feel right and I would drift from system to system having mediocre or poor results with all of them. Thankfully, reflecting on these results paid dividends.

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What really excited me (and still does to this day) was how markets moved at a Macro scale and how political and economic mechanisms shaped markets. I was more interested in the immediate price action that ensued large events to be far more speculative and qualitative than quantitative. If Trump wins the election, what will happen next, how will that influence X and Y and how can I find trades that could benefit from this narrative.

Yes you need both quantitative skills (basic) and speculative ability , don't get me wrong. The truth however is much easier than people would like to admit. You simply need to find a basic risk reward relationship that makes more money that it loses and can sustain your specific trading goals. My own psychological make-up was:

  • Extroverted and dominant
  • Perceptive and strong-willed
  • Strategic and visionary

On the flip side of course:

  • Low attentiveness or attention to minutia
  • low tolerance for poor performance
  • Exceptionally high neuroticism
  • Assuming the absolute worst - media definitely perpetuates this

Trading some statistical arbitrage system or mechanical system is my worst nightmare. I truly value breakouts, big volume and market leadership (growth and breakout stocks). In alignment with my own wants - big explosive moves that gave me feedback within days, not  months and years.

"Give me the feedback and give it to me now". Paradoxical qualities which have made me find the best stocks in the world and sell them just before they  launch into the stratosphere but I get better every season.

Signs a System Doesn't Work for You

The sunk cost bias is an absolute killer. I have struggled to follow rules and trade consistently for a number of years and still deviate from time to time when things become overwhelming. I work a full-time and intense job and also trade, balance can be challenging.

Trading, like any performance sport or art requires concentration and focus, I had to find a system that suited this as well!

There needs to be a very structured approach to finding a system that helps you find your own strengths and weaknesses to really get into a niche that fits.

If you are finding that:

  1. You hop from one system to anther
  2. You can't keep stop losses and let losing trades spiral downwards
  3. Somehow the system doesn't make sense or you don't "get it"

There is a chance you either don't understand the system, or possibly, it doesn't suit your particular skill set or tendencies.

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So How Do I Know What Works?

Finding a system that works for you typically brings a series of "Aha!" moments when you are trading or studying it's mechanics. I had a number of breakthroughs after I began back testing or simulating trades by replaying charts and taking some imaginary trades (read here on how I do it). I used Tradingview which has a fantastic replay function and pull out a trading diary to see what my N=100 would be. Video on how to do this here.

Understanding exactly how to trade it and using a trading journal to simulate the results showed me that the system worked, made money and was far simpler than I ever would have thought. So simple in fact that I thought it was suspicious. Seeing it in real life makes all the difference.

Of course you have to be careful of curve fitting and picking a handful of stocks that you knew were massive runners. In reality though, you are only kidding yourself so what is the point in cheating? I pick a sample of 20 random stocks and repay them to avoid this behaviour.

Once I gained confidence I began putting the system into practice, incrementally increasing the position size as my confidence grew and then pairing it back if I made too many mistakes. I noticed that:

  1. Some rules are timelines, and others are just seasonal or lucky. I love supply/demand economics so systems with price action made sense
  2. The interplay between volume and price left clues as to human behaviour, another field I find fascinating which keeps me engaged (aligned with my style)
  3. Getting in and out of trades became more and more obvious. It became hard for me to act on tips and BS info.

The Ultimate System Without Emotional Trading

What truly hit home for me was not being able to take shitty news feed, Twitter related hype trades anymore. There were a series of moments I felt tempted but decided to use a rational data driven approach to trading vs an emotional "knee-jerk" approach. My sub-conscious was slowly breaking down my faulty beliefs and forcing me to take higher quality setups. A result of the testing and practice routine.

It became so hard to take bad trades because I would feel like such an ass for knowing how to make money and then throwing my edge out the window because a friend would tell me about the next "sure thing". Seanie lad - if you read this, stop telling me about cannabis stonks!!

Friends, family, websites, news feeds and all the other entertaining but unprofitable sources of information became so annoying that I told people to stop talking to me about trading. 99% of people are not trading and are in fact gambling. Sure, some people get lucky and it can last a very long time, without a real strategy though, they always face a day of reckoning.

Trading Gurus are a dime a dozen - you have the skills to trade and learn, developing them now will be the difference between total success or ultimate failure.

Understanding Your Trading Psychology

There are endless piles of.... let's call it information, strategies and resources on the internet. This can be more of a hindrance than a help. So my first piece of advice is to really looks inwards instead of outwards into this endless mess of marketing. Think first about what drives, motivates and keeps you engaged, then think about a system. Taking full ownership of your system starts at this point. What do you like and what do you naturally gravitate towards. Not what did mom and dad or your friends say you like. What do you like, really! Do you actually know?

Some suggestions would be:

  • If you are highly technical and process driven - perhaps a more quantitative style suits your needs? Options, and programmatic systems  make sense to investigate.
  • If like me, you value bits and pieces of each system, swing trading may interest you.
  • Perhaps (and the harshest of all). You only want to make money and don't actually want to put in the work. Then try day trading! (Totally kidding but this is the garbage they will shill you in the internet).

There are also tons of aptitude and character shaping tests that you can investigate to find out more about what you lean towards. Some of the tests I have done after the fact have been:

  1. the DISC assessment - there are tons of free resources online. Example here
  2. Big five personality trait assessment
  3. Etc - there are tons of them and they pretty much all say the same thing in different ways!
On the Use of the Big Five Model as a SEL Assessment Framework - AWG

The above is a generic illustration of the "Big Five" traits. You can make a few assumptions here. I am quite an outgoing and extroverted person with high neurotic tendencies. If I were to trade an options only systematic system - you may as well sign my into the psychiatric ward at your local hospital.

Tests do Not Define You

An important note on these is to not box yourself in by some basic statistics about your personality. It is possible to shift into fields where we have more genetic limitations than others and still do okay. Also, some skills and concepts are not a factor of genetic limitation and may be a function of belief systems, another topic I have written on extensively.

The overarching message is - if you don't believe you can trade the system you are running now, find the tasks involved in performing well extremely boring or repetitive and overall lose interest in trading - there is a good chance you are building the foundations for your own failure in money making via the stock market.

The sunk cost fallacy is a real killer in trading or investing. Just because you have been reading, trading and struggling with a particular method does not statistically mean you are going to make money in future. This is also known as the "Concorde Fallacy" - easy to see why.

Time to be real with yourself, and get thinking like a trader. This involves cutting losses in trading and in life. Maybe it's time to move on? Maybe it is time to redefine your approach and go back into uncertainty. Yes it sucks, sure it will be hard. What is harder though? Staying with a losing system? Or finding one that works?

Wrapping Up

For those coming to blogs looking for easy answers, I hate to disappoint (kinda). If however I can save you time, money and emotional pain then I sincerely hope these messages are hitting home. Trading like any other sport or business pursuit takes time, experience and I shit ton of failure before the real gains begin coming in. In some rare cases people are wired to capture this truth far earlier than others, the reality however is that nothing in life that is worth it comes easy. And if it comes easy, it is never appreciated and respected as it should be.

It takes great courage to look at your mistakes and habits head on - which is a lot of what trading is. If mastered however and you find your groove and get into a flow state - it certainly is possible to make more money than any other pursuit there is. If you have what it takes, you will need to dig deep.

Remember the rewards are more than financial. The personal depth and ego shattering experience offered by trading is the business ayahuasca of our time. And just like any good trip, what you take into it is what you will get out of it.

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