Trading is a word which ecompasses a vast array of individuals and businesses. In the financial and cryptocurrency markets there are many kinds of trading, so it’s important to understand what kind of trader you are and what objectives you aim to fulfil by trading.
The goal of this article is to:
- Recognize how different types of personalities/traits affect trading;
- Identify your style of trading;
- Identify your level of commitment to trading
- Understand how a trading system fits you
Let’s get stuck in.
Top traders common traits
The world of trading and markets contains endless opportunities and a myriad of approaches. It’s important to understand where you fit as you embark on your trading journey.
There are specific characteristics that top traders and market participants have in common, such as:
- Big picture thinking. They develop a world view allowing them to draw together various pieces of information that don’t seem to connect, make connections and develop thesis and trade ideas.
- Rational and analytical. They tend to focus on processing information as opposed to using their feelings. A key skill they possess is in cherry picking the right information.
- Organised. They are able to classify information into categories and be focused on how they think about things.
What if those traits don’t describe you? Does that mean you can’t be a great trader? Of course not. These are common traits among top traders. You can still be a successful trader with consistent idea generation and a disciplined approach.
It comes down to your objectives. If you’re looking to manage your money and grow your portfolio through trading, you can do well without having all these three traits (you may already possess one or two of them). However, if you are trading for ‘income’ or out of necessity, you likely will not succeed… better playing the lottery.
If you don’t have any of those traits, you’re probably not attracted to trading, but if you’re reading this, you probably already have at least one of those traits.
Psychology has a substantial impact on your trading. If you currently trade and reflect on past occasions, you may remember a time when you were angry about trading, fearful about the position, and understood how those affected your ability, decision making and performance.
Successful traders can replace emotive elements from their decision making and replace them with logic. They have confidence in their positions due to the justifications, research and risk management steps followed prior to entry. They can accept not every position opened will be a winner and are comfortable when their position or book is offside.
Beyond fear and greed
Psychology in trading goes beyond just fear and greed.
- It covers the full range of emotions. It’s not just fear and greed: it’s also sadness, happiness, anger, regret, frustration and elation. Being able to manage your mental state is a key skill for traders who have been around for a long time, their temperment (and blood pressure) rarely changes, they are a metronome.
- Beliefs affect your trading. You don’t trade the markets, you trade the beliefs about the markets. Imagine a chart going up: what would you believe about getting in or getting out of that trade? Whatever you’re thinking about entering a trade, exiting a trade, or not doing a trade, are all based on your beliefs.
- Ability to follow rules. It’s a matter of discipline. If you have trouble following rules, it might be an indication that the system doesn’t fit you. If you’re able to follow those rules easily, you have some idea that those rules align with your beliefs and that they work for the system.
- What’s your comfort with risk? Some people are willing to bet the farm, go “YOLO”, others are conservative and only risk a small amount because they want to maintain the rest of their equity. So wherever you are in that spectrum, it’s good to identify and understand it so that you can grow your portfolio and manage your risk.
- Who you are and why you are here. Trading is an unstructured endeavour, you need to know how trading fits into the answer to these questions, so you can succeed as a trader. If you think it’s just about earning money, there may be a lot more there that you may have not discovered yet.
Hobby or business?
How are you going to treat trading? As a hobby or a business, and how can you tell the difference?
There’s one easy way to tell:
- Hobbies tend to cost money. People have an activity on the side. There are free hobbies, but usually people put money into them.
- Businesses aim to make money. A business on the other hand is a venture that (intends to) make money. You may not be making money at trading — yet, but you have plans to. You might view this learning phase as an early stage of business before it becomes profitable.
Both are valid approaches whether you treat trading as a hobby or a business.
If it’s a hobby, then risk management is all the more important so that it doesn’t cost you a lot of money. If it’s a business, what would you have to do to consider it as such?
There are two main things to consider when treating trading as a business.
Commitment and management
Treating trading as a business requires commitment. You’re committed to becoming a (great) trader. You intend on putting time, effort and money into your venture.
It also requires management, through a process of multiple steps:
You start with the objectives of starting a business; you move to a plan; you create processes to execute the plan; which generate results; for then to compare the results to the objectives, and iterate the process again.
It’s a management process for your trading business. You can also take this approach for a hobby, but you may not have the level of commitment that you would have if you were to consider it as a business.
There are some additional factors to consider when you think about what kind of trader you would like to be.
Amount of money
How much money do you have? For example, in the US, to day-trade stocks, you need to have an account minimum of $25,000 USD.
You can day-trade other instruments such as Forex or Futures contracts, but they carry higher risk due to their contract sizes which may result in risk management issues.
The amount of money that you have will affect the kind of trading you’re going to do.
Amount of time
If you’re working a full-time job, you will probably not have enough time to day-trade. Maybe you look at the charts in the evening and update your orders then.
If you don’t have time in the evenings, maybe you go to the weekly charts and your trading activity on the weekend.
Time of day
Another potential issue is the time of day. Depending on where you are in the world, you may not be in a timezone conducive to trading specific markets.
You may be located in Asia and want to trade in the US markets. Or you may already be in the US, but if you’re on the East Coast with a full-time job, you won’t be able to day-trade effectively. On the other hand, if you’re on the West Coast of the US, you could get up early, trade the east coast market hours opening and then get to work at a reasonable time.
Type of instrument
Whether you are trading Equities, Forex, Futures, Options or Perpetual contracts, etc. Some of them have more leverage, or the brokers are willing to give you greater exposure to trade certain of those.
The type of instrument that you use is driven in part by the margin available, your personal preference and if you have any special knowledge of that kind of instrument.
This refers to the kind of trading system you will be using. Let’s go through a few of them. Note that these aren’t all the styles that are around, but there are a few basic ones, and they tend to work.
- Trend following. This is the idea that price is going to move a substantial amount over a period of time, and you’re trying to identify the trend and join them.
- Fundamental analysis. If you have some special knowledge about supply & demand, especially in commodities, this can come in handy for trading them. It can also apply to business if you have certain insights into particular industries.
- Value trading. This means you’re trying to figure out where the value is. Where can you find the opportunities that are undervalued, and buy those, or those that are overvalued, and sell those.
- Band trading. Bands help guide your understanding of what price is doing and how it is behaving. There are a number of bands/systems, like the turtle. If they make sense to you in the chart, they may be useful to you.
- Order to the universe. This may feel a bit “woo-hoo”. It’s the belief that the Universe has this grand plan and that those natural laws affect the market and prices. Examples of this category are the Elliot Wave Theory and Gantt.
- Chart patterns. These reflect human psychology, which doesn’t change that much. When studying charts, you will notice that certain patterns tend to show up again and again. If you understand what those patterns look like, you can base some trading systems off of those.
In summary, you might look at all of the above and think you don’t know which one of them would fit your style. That would be a fair response to someone who hasn’t done (or much) trading yet.
But as you were reading them and do some additional research, you might notice you were drawn to one or more of these types. Or, at least, one of them seems to make a lot of more sense to you.
If that’s the case, that may be an indication that that might be the one to start looking at and figure out building a system around.
As outlined above, trading and managing a portfolio is never as straightforward as it may initially seem. Opening and funding a trading account is easy however, 90% of people lose 90% of their capital within 90 days. It is not for the faint of heart. Some key traits are highlighted below:
- Biases affect trading. They often operate at a subconscious level, so becoming aware of them may be a challenge.
- Personality traits may be useful. Top traders share certain characteristics that make them stand out.
- Additional factors such as money, time, time of day and type of instrument determine your trading.
- Trading styles favoured by certain type of traders can make money over time for systems build around them.
If this all seems too much, Basis Markets are bringing the perfect solution, our soon to be launched BTX handles much of the drama for you, its unique features allow even the most novice traders to identify, execute and exit profitable trades.