If you have stayed with me through the first 13 chapters, you should now have a basic understanding of personality traits. But you did not buy this book just to learn about personality. The real question you want answered is: Which personality traits make for successful trading? And the follow-up question you likely have is: What can I do to adapt my personality to be more like the personality of successful traders?
We already know that it is unfeasible—if not downright impossible—to significantly change your personality. But even so, wouldn’t you still like to know if there is a certain personality profile that successful market traders have? Are there certain traits that make for better trading? Because if there are, maybe it is possible for you to adapt or modulate yourself to compensate or take into account your weaknesses and take full advantage of your strengths.
Again, this is a key principal: We cannot significantly change who we are, but based on our life experiences (good and bad) and our deepening appreciation of ourselves, we are able to learn to adapt in a healthy and beneficial way. Learning about what makes for a great trader is the first step, as it gives us something to compare ourselves to.
We will first turn our attention to neuroticism and trading. Neuroticism is one of the “big two” domains, as you know from the previous chapters. But when it comes to traders, it should probably be called “the big one.” That is, this domain comes into play the most frequently, for better or for worse, in the lives of active traders.
A 2005 research study by Lo, Repin, and Steenbarger1 looked at the personality traits and emotions in a group of 80 volunteers—all high-frequency futures day traders who had enrolled in a trading seminar. Some of these traders were novices, while others were more experienced. So it was a real mixed bag of traders. For one entire month, the study participants filled out daily mood surveys that rated their emotional states as well as their ongoing trading performance. The results showed a clear connection between the degree of emotional reactivity, as measured on the daily surveys, and how successful a trader was during that month, as measured by normalized profits and losses. The daily mood ratings clearly showed that those traders who had more controlled emotional reactions to the markets fared better in the profit and loss column. Meanwhile, those traders who experienced more intense and reactive emotions displayed significantly worse trading success. Of note, this result applied to both positive and negative emotions; that is, overall significantly poorer trading performance was seen in those traders who experienced either positive emotions (happiness, joy, pleasure) after winning trades or negative emotions (anger, anxiety, depression, vulnerability) after losing trades.
The authors of the study were quite perplexed, however, because they also obtained NEO-AC personality testing on all 80 of the research subjects, and it turned out that they found no correlation between successful trading and an individual’s level of neuroticism. Nor was there a connection between any of the other four main personality domains and trading success.
So what’s going on here? Why was their no correlation between trading success and neuroticism? Well, for one thing, it should be mentioned that, in this study, they used the simplified version of the NEO-AC, which does not break down the five main factors into the 30 individual facets (again, there are six facets to each of the five main factors). So is it possible that, by using the more detailed NEO-AC that breaks neuroticism down into its components, that something could be garnered that the simple NEO fails to show? Or is it that Lo’s study had too few participants (“not powered up in size”) to really show any patterns?
A 2011 MarketPsych LLC report issued by Richard Peterson and coauthors also looked at personality testing in investors.2 In his unpublished white paper, Peterson reported on 2,600 investors who took an online version of the simplified NEO-AC test. It is not clear what kinds of investors are included in this study (long term versus short term, stocks, mutual funds, futures, or what), and it is assumed that a hodgepodge of people likely completed this free, quick, and easily accessed online test. Peterson admits in his report that there is no way to verify whether the people who took his test accurately and honestly reported their financial success as investors. Nevertheless, the results from this very large study showed that low neuroticism (as well as high openness) had the highest correlation to successful investing. While contradicting Lo’s earlier findings, the sheer size of this study does tend to lend it more credibility.
Why is it that “cool cucumbers” (people low in N) in Peterson’s study appear to be making more money? The reasoning harkens back the diagram in Chapter 3 depicting the direct and indirect circuits of the brain. Even-tempered, emotionally stable, and mellow traders are able to continue to carry on making logically sound decisions, after either winning or losing trades. Neither the excitement from a recent slam dunk trade nor the shame, sadness, anxiety, and anger of a recent defeat are blinding these people’s better cognitive judgment on the next set of decisions they need to make. Simply put, they are better equipped at handling the emotional rollercoaster ups and downs that cause others to panic or make other rash decisions based on emotions alone. Equally important, they likely don’t let those emotions originating outside the trading world (marital strife, for instance) get in their way of trading. Their cognitive prowess and critical thinking skills are not being short-circuited or overrun by their emotions.
So the research already out in the public domain lends itself to the idea that one’s emotional state while trading is vitally important. Any strong or reactive emotional response is counterproductive. Emotionally reacting to either winning or losing trades is likely going to have a negative impact on your success in the markets. And that makes common sense.
Why? Because trading the markets is not a form of gambling, so much as it is a form of art and an intellectual pursuit. In pure gambling, luck (chance) is the predominant force in deciding who wins and who loses. Trading the markets, on the other hand, makes frequent use of those higher, cognitive brain functions (such as logical reasoning, mathematical computations, recognition of patterns and trends on a graph or in a table, short- and long-term planning, executive decision making, and so on). Your ability to use these higher brain functions (which are carried out in the cortical regions of your frontal lobes) can easily be “short-circuited” by strong emotional reactions that are taking place in much deeper areas of your brain (the limbic lobe). Those traders who are able to limit the influence of the limbic lobe on their frontal lobe, according to the research, are more successful in trading the markets.
The 2005 and 2011 studies mentioned above certainly caught our interest, but we wanted to delve deeper into this matter. My father and I decided to do a study of our own. We decided to give the full-length version of the NEO-AC personality inventory, but only to a group of top-notch, extremely successful futures traders from around the world. We wanted to learn if there are certain personality traits that the world’s best traders share, and, if so, how we can apply that body of knowledge to better understand ourselves and achieve more prosperity in our own trading.
Unlike the research project above that looked at a group of traders of differing or even unknown levels of experience and investing results, we specifically and carefully hand-selected a cohort (group) of traders that has consistently demonstrated an ability to succeed at trading the futures markets for years, if not decades. These are traders who have managed large sums of money, won trading championships, and so on. Real traders with real track records of success. Initially we started this research out of curiosity, with my dad being the first to take the test. But eventually, as we discussed with traders their results, they encouraged us to further share the results, and the idea of this book was born.
So, do you want to know the results of our research? Of course you do. We found that the total neuroticism score (N) for our cohort of very successful traders was actually average, just as was found in the 2005 study by Lo! Are you surprised? Did you anticipate it was going to be low? We did.
That’s right; at first blush it appears these great traders are not quite the cool cucumbers we had expected they would be. They don’t appear to be raging neurotics with emotions that erupt like Vesuvius, but they are also not the most emotionally stable group either.
But when we look at neuroticism on the facet level, we find some very interesting results, indeed. It turns out that these winning traders routinely fared quite a bit lower on two of the N facets: N1 (anxiety) and N6 (vulnerability). That is, these successful traders, compared to the average people walking around on the street, experience far less anxiety and feel far less vulnerable to failure and defeat when they are placed under stress. There were no such clear patterns with the other N facets. In fact, in order to make an overall average N score in this population, some of the other N facets were a bit higher than average!
So, it would make sense that learning how to manage and control feelings of anxiety and vulnerability under stress may potentially lead any trader (including you)—no matter where he rated on the N1 and N6 facets—to better profits in the markets. But how to do that? If you are someone who scored higher up the ladder in either of those two facets, N1 and N6, pay special attention!
Moving beyond the raw data scores from the NEO-AC test, we also engaged some of our research subjects in some in-depth psychological interviewing. From our discussions with these stellar traders, it became clear to us that it is not just how emotionally reactive someone is under stress, but more, important, how well she is able to regulate and manage that reactivity when it comes up that is critical.
Although in our study most of the top traders have low N1 and N6 scores, not all of them did. And it was the several stellar traders who did not have low N1 or N6 scores that fascinated me most, and these are the ones when I interviewed in more depth, to find out how they are able to consistently be successful in the markets, despite being prone to anxiety and vulnerability.
The consensus was pretty consistent and clear. More emotionally reactive traders (that is, those with higher N1 and N6 scores) can—with experience—learn how to modulate the way their emotions ebb and flow in response to the markets. These are traders who have learned how to thrive despite being emotionally reactive creatures.
But enough of generalities; let’s put some of this knowledge garnered by our top traders into practice and also see how it really applies to us.
Neuroticism, again, is the tendency to experience negative emotions, especially under stressful circumstances. Those traders who score higher in N are more prone to having their emotions interfere with their trading. Winning trades that bring excitement and pleasure may result in overconfidence, which can lead to reckless decision making on the next trade. Losing trades can instill fear, anger, and self-doubt, which can result in hesitation and possibly missing out on a prime move in the markets. Top traders consistently report that the anxiety they experience with trading has to do with (1) the fear over losing money, and (2) the fear of feeling embarrassed by being wrong.
A very successful trader took the NEO-AC, and his total N score was, interestingly enough, high at 97. Again, almost all of them had average N scores, so this guy was an exception to this rule. Most prominent in his case was an N2 anger-hostility score of 25 (nearly off the charts). With a score such as this, one would expect a tendency to become angry or hostile, either at those around him, or inwardly at himself depending on whether he was an introvert or extravert, of course. In this case he was an introvert.
An introverted person with this high an N2 score is prone to beat himself up over a losing trade, belittle himself, and over time, develop a low sense of self-esteem. He is vulnerable to taking out his anger on himself, or on the markets. He may fall into “revenge trading,” whereby he is trying to regain money lost in a previous trade. This is like the tennis player who, having just lost a point after a very protracted and energy-depleting rally, now tries to overcompensate on her very next serve. Instead of serving as she has trained herself to do countless times (just the right amount of velocity, spin, and angle), she instead takes her anger out on the next serve. And of course she smashes the ball straight into the net with an incredible force, and she just lost another point, compounding the frustration. Those prone to anger need to find healthy ways to “vent” after a losing trade, before the initiation of the next trade.
Another trader, well known for his trading exploits, has a high depression (N3) score that has affected his trading at times. His story is interesting and educational enough that he agreed to have a whole chapter of this book devoted to his situation. Both of these “neurotic” traders have been very successful in the markets for long periods of time, despite some rather worrisome trait scores. But despite one or two personality traits seemingly stacked against them, they have (in one way or another) learned to recognize their weakness in neuroticism and adapted to it. They succeed despite these traits, not because of them.
The N1 (anxiety) facet deserves special attention when it comes to trading the markets. Again, our winning traders in general were low in N1. The primary anxiety of market trading revolves around the fear of losing money as well as the fear of being a failure. Nobody likes to lose money, granted. But in this high-stakes, fast-paced, and often (but not always!) unpredictable and tumultuous game we call market trading, those who rate high in N1 need to pay particular attention to their level of anxiety as they trade. The fear of losing money is huge and should never be trivialized; it is often what triggers a bad decision or diverts one’s full attention from the logical process of assessing the markets. How many times have you gotten out of a small winning trade right before it turns into a big winner, all because you were fearful the market was going to turn against you?
Anxiety frequently involves the scrutiny of something that actually does not or should not need much thought at all. Think of the talented football wide receiver who “chokes” in the fourth quarter of the Super Bowl on a pass he normally could easily catch, even with his eyes closed. A routine and automatic act he has done thousands of times since childhood is suddenly upset and overturned by being too aware of what he is doing in the moment. It only takes a nanosecond of distraction by fear for the precision and timing of a complex football play to be totally blown to smithereens.
The kind of fear I am referring to right now is that of being judged by others. It is a fear of not being capable or not being up to the task of performing under pressure, when the chips are down and it really counts. Subtract the importance of the game, the noisy stadium crowd, and the fact that the whole world is watching on TV, and the wide receiver would easily make the catch. But instead, he is too aware of the moment and the potential for fear, and he freezes up.
Of course when you are trading in the friendly confines of your own home, there is no national TV audience watching your every move in the markets. So this is not quite “performance anxiety” in the true sense of the disorder. Yet in another sense it is very much related to performance anxiety. Because every move you make while you trade is surely being watched by the harshest and most critical judge of all: yourself. In trading, generally you are the only one who is putting the immense pressure on yourself to succeed. Being your own judge, you can get yourself into some serious “mind games.” As the saying goes, you turn into your own worst enemy.
A typical mistake that anxious traders make is exiting a winning trade too early. They have identified a very specific exit target (price), but for some reason they start doubting themselves and their ability to forecast what the market is doing. And then they abort their trade too early, over fear that if they don’t take the small profit now, they may lose it all and more momentarily. What could have (and should have) been a big winner all of a sudden is cut down into a minor profit. And minor profits are not going to cover the big losses every trader (even the best ones) is bound to have from time to time.
How to solve this problem? Ask Jerry Rice: the greatest wide receiver of all time. I encourage you to read the speech that Jerry gave when he was inducted into the NFL Hall of Fame. It’s very motivating. Here is the most important snippet from that speech:
I’m here to tell you that the fear of failure is the engine that has driven me throughout my entire life. It flies in the faces of all these sports psychologists who say you have to let go of your fears to be successful and that negative thoughts will diminish performance. But not wanting to disappoint my parents, and later my coaches, teammates and fans, is what pushed me to be successful.
The fearless Jerry Rice admits that fear is what drove him! The only way to overcome the anxiety associated with performance is to keep performing the act or behavior over and over until, it is no longer anxiety-provoking. For Jerry Rice, it meant playing in lots of crucial games. You can be sure Jerry was far more comfortable with each subsequent big game, big stage, and big spotlight he was put in. You often will hear superstar athletes describe the experience of not hearing the noise of the audience or even feeling like things are moving in slow motion, when the pressure is really on. They are so focused on what they are doing that the fear and the things that should be causing fear are totally displaced from their minds.
The psychological term is “habituation.” It means that the more you expose yourself to an anxiety (instead of trying to avoid it), the sooner your body will learn to deal with the anxiety, and the sooner the anxiety will dissipate. Once the anxiety has dissipated enough, it no longer severely affects your trading performance.
However, don’t start with the Super Bowl. One of the main tenets of treating anxiety is to start with low anxiety-provoking situations and then continue to confront increasingly more stressful scenarios. Start with paper trading, of course. Then, as you start real trading, start with less volatile and scary markets. Start with small positions. Gradually and incrementally increase your risk as you get accustomed to each new level of trading anxiety. Use mental rehearsals and guided imagery to confront anxiety-provoking scenarios before tackling them in real time. That is, close your mind and imagine you are in a very stressful and anxiety-provoking trade. See yourself come through it intact and unscathed. The more you do this, the more your brain will habituate, and the easier it will be to teach your brain to develop healthy coping strategies to overcome anxiety. Soon it will become automatic.
Do you remember the first time you got behind the wheel of a car and tried to drive? Remember how anxious were you then? You were checking your rear view mirror every five seconds—to the detriment of not looking out the window in front of you! You dared not drive on the freeway, as that seemed way too fast and frightening. But over time, months or maybe years, you got so used to driving on the freeway that it became automatic. Today the biggest risk and fear in your driving habits is that of becoming so lackadaisical while driving on the freeway that you may miss your exit or fail to notice the idiot driver who is trying to change lanes next to you. Driving no longer seems scary—unless you are asked to sit in a car with a Formula One racecar driver, speeding around the track at speeds in excess of 200 MPH with other cars all around you doing the same thing, just inches away. Now that’s scary, right? To you, yes. To the professional racecar driver, however, it’s not. His mind has already become habituated to the fears of moving at 200 m.p.h.
Anxiety, it turns out, is all relative. It’s nothing more than being confronted with a new scenario and not knowing how you are going to perform under these new sets of conditions. The only way to conquer it is to confront it and habituate to it.
The very worst thing you can do to treat your anxiety is to remove yourself from it, because you are denying your brain the chance to habituate. If every time you are in a winning trade you abort it early because you are starting to feel anxious and doubt yourself, you will never learn to trust your abilities (and intuitions). So you gotta stick it out, for better or worse. Don’t abandon ship at the first heart palpitation or the first drop of sweat.
It can be a very uncomfortable process to force yourself to remain in an anxiety-provoking situation when your mind is telling you to get out of it. But it is the only way to overcome this problem. If every time Jerry Rice felt nervous in a big game he chose to sit out and just observe the action from the sidelines, he would never have learned how to become a big-game receiver. He would never have developed the ability to perform under pressure and master his emotions.
Therefore, do not flee anxiety.
Anxious traders tend to make other mistakes, too. If you ranked high in N1 (or any of the other N facets, for that matter), be sure not to set goals that are overly ambitious. You are only setting yourself up for disappointment and eventual failure. Your anxiety level will only increase if you do not meet your lofty goals, and that is the last thing you need.
Instead, try to avoid setting goals with dollar signs attached to them (“I aim to make $5,000 this month”), because if this month just happens to be an unlucky month and you don’t reach your specified dollar goal, it may cause heightened negative emotions. That, in turn, will very likely spill over into poor trading performance during the next month, which perhaps could have been a good month . . . if only you had not become so emotional after missing your goals from the previous month. The result is now you have two bad months in a row! Our successful traders told us again and again that they are not focused on dollars when they trade.
Instead, create goals that are challenging and exciting, and yet still very attainable. Instead of promising yourself to make a set amount of money, set “process goals” (“I will make X number of entries this month,” “I will monitor my trades with Y frequency during the day,” “I will follow this trading system in Z market for the entire month”). Reassure yourself that, if you stop thinking in terms of only profit and loss and instead keep to these very concrete process goals, the profits are bound to eventually follow. This is what the successful traders report time and time again.
A very dangerous (and unfortunately all too real and too frequent) mistake that rookie anxious traders make is to overtrade. This is a huge source of losses. In fact, it’s a bottomless pit of losses—a real Bermuda Triangle! Traders who are acutely and actively worried about their current financial situation (such as fears over not having enough to pay this month’s mortgage, not making enough money to justify forgoing “a real job,” or not having enough to pay for their kid’s college tuition) can easily fall into the trap of trying to hit a homerun under less than favorable conditions.
At the risk of overusing the sports analogies, I’ll ask you to think of playing baseball in a storm. It’s rainy, it’s cold, the wind is swirling around in all different directions, and the field is wet. This is no time to be swinging for the fences. Either take a rain check, or play a game that makes sense for the conditions. Hit singles. Look for defenders to make errors catching and throwing the ball. Play your strengths.
If you are fiscally behind the eight-ball, do not start increasing your hedges. Either get out of the markets and close your trading account, or come up with a strategy that will work under the current conditions. The all-too-commonly seen mistakes traders make when feeling fiscally anxious include getting into more contracts than they should (in order to solve their problems and reverse their losses all at once), trading when market volatility is low (grabbing for straws when what they really need is a life raft), trading when a pattern or indicator is only half there (launching a “Hail Mary,” in the hope that something might miraculously come of it), trying to make up a losing trade with a quick rebound trade (like a “rebound relationship,” this is just not going to work out well), and deviating from one’s predetermined plan and strategy (don’t start changing a known and reliable recipe for success).
As risk increases, so too does anxiety and the likelihood that you are going to make a stupid mistake. Take a basketball player shooting free throws. At the start of a game there is far less pressure, and it is easier to make a free throw. It just happens. But at the end of the game when the score is close and there are only a few seconds left in regulation, exactly the same shot becomes much more difficult—but only more difficult psychologically. It’s still the same distance to the hoop, and the hoop is still the same diameter. But the research shows that the chances of missing a late-game free throw are much higher than they are for an early-game free throw.
Trying to manage 20 contracts, likewise, is very different, psychologically, from managing just one. One is far easier, because the stress is much lower. As more money and more of your self-esteem are at stake, the more you are going to feel nervous. With twenty contracts in play, you are far more likely to overanalyze the market or let your emotions distract you, even if for just an instant, culminating in a foolish mistake that you normally would not have made. The way to solve this problem is to titrate risk.
Titrate means to increase a dose (as of a medicine) slowly. Doctors often start medications slowly and then gradually ramp up the dose as the body gets accustomed to it and there are no side effects. Do the same thing in trading. Don’t jump from trading single contracts one month to a dozen contracts the next month just because you are on a hot streak. Your anxiety level, no matter where your score is on N1, will not be able to tolerate it! Pace yourself, and build up emotional endurance in the markets.
But don’t take all of this anxiety stuff too far, either. If you are feeling anxious about your trading and it is affecting your results (perhaps to the point where you wonder whether you will ever succeed again), don’t jump to the conclusion that you have some deep-seated, hidden, or even subconscious psychological disturbance that needs to be uncovered before you can move on and succeed. Please, do not look up a hypnotist or psychoanalyst in the yellow pages! Likewise, don’t rush to assume that all this anxiety you feel means that you need to “trash” your current trading style or systems and start with something totally new and fresh. Those are likely not the solutions to your problem, and if anything are only going to compound things. The real solution to your anxiety lies in habituation and titration, as described above.
For those high on the N1 anxiety scale, it will probably serve you well to avoid frequent checking of your trades, as this will probably only heighten your anxiety. But if you don’t check up on you trades often enough, this too will be a source of worry. It is best to develop and then set predefined time intervals that result in minimal anxiety, and then train yourself to check only your active trades at those specified intervals (of course, always be sure you are trading with stops!). Strategizing and making a schedule like this makes you master of your anxiety!
A great way to do this is to start a journal wherein you rate the level of your anxiety at the end of each trading day. Separately, keep a log of every time you check your computer monitor, iPad, or any other device that gives you an update on your market positions. You are bound to see a pattern where peak anxiety occurs if you are either very rarely checking your trades or are checking them too frequently. Identify the middle ground, where anxiety is the least, and then stick to checking stocks only at the designated intervals. This will reduce negative emotional reactivity and make you a better trader.
Fear of losing money and of not performing up to your own expectations may be the most prominent anxieties traders routinely face, but they are certainly not the only ones. Another main one is fear of being proven either wrong or a deficient trader. Many traders have difficulty admitting to their spouses or others if they are in a bad trade. They may either deny it or minimize it. Not just because of the financial setback, but because it may reflect poorly on them as a person.
People who rate high on the N4 and N6 facets (self-consciousness and vulnerability) are particularly at risk for this kind of fear. It’s an image thing—they are afraid to be shown up as poor or deficient traders. This can be a cruel form of psychological torture for those very high in N4 or N6 and can be especially damaging when the trader is so fearful about losing face that she starts denying to herself the extent of her losses. Usually unknowingly, she will fail to recognize obvious mistakes she is making in her trading behavior, because it is too distressful for her to come to the realization that she is wrong about something. It is often only after it is too late (her trading account has run dry) that she is able to step back and admit she was wrong about something in her trading strategy. So if you are high in N4 or N6, watch out for the perils of self-denial!
Being high in N5, impulsivity, probably speaks for itself. These are the people who are too trigger happy when it comes to entering (or exiting) a position. They give in to temptation. They don’t do their due diligence. Or they may try to do their due diligence, but they still just can’t wait, and they act prematurely. They think they might miss out on a good thing, so they impulsively make a snap decision before really investigating things. In the aftermath they realize, “Gosh, I forgot to think about variables X, Y, and Z.” But take heart. one good thing about being high in impulsivity is that a good solution is usually readily evident (though not necessarily easy to follow).
Overtrading is one way to spot highly impulsive traders. Neglecting or even totally forgetting about active trades that they already have on, they take on more and more trades in an impulsive way. In real-life, individual trading (when you are your own boss and are responsible for all of your actions), each and every trade has to be cultivated, observed, managed, and eventually exited with great care. The greater the number of trades going on at once, the harder this is to do, and the more likely it is that you will make a costly mistake somewhere along the line. The impulsive trader gets in over his head in sheer number of trades simply because the temptation for one more “sure thing” trade is something he can’t pass up. Often times overtrading occurs in volatile market conditions, when the impulsive trader feels he has to “do something” simply because the market is bouncing around and not because a particular buy or sell pattern is forming.
But the more you trade, the higher your costs. And the more you trade, the higher the likelihood that you will be distracted by market noise and have an emotional reaction to something that is going on. Interestingly, our survey of successful traders found that by and large they are generally not trading many positions at once. They focus their resources and attention on a small number of trades. Why? On an emotional level it’s hard to manage multiple trades simultaneously. And a single emotional reaction to a bad trade has the potential to ruin several other trades that are actually winners; this happens because your logical mind has been commandeered by your emotions at that point. Part of good money management is knowing what your limits are in terms of the amount of time and energy you have to keep up on your trades. For the impulsive trader who trades too frequently, probably the best advice is to simply do less than you are inclined to do.
Remember how we said that personality traits are pervasive? That means that they generally span different areas of one’s life and are not limited to one arena. So an impulsive person is generally going to be impulsive about many (maybe not all) things in life. Your typical impulsive person is going to find it just as hard to resist placing a trade too early as it is to resist eating that last piece of Black Forest chocolate cake in the refrigerator. Research shows that the best way to manage impulsivity (let’s use the piece of chocolate cake to help us see this) is through (1) putting into place a system of checks, and (2) close monitoring. This applies to both Black Forest cake and trading the markets.
Remember reading about the story of Odysseus by Homer? Coming back from the Trojan wars, Odysseus ordered the members of his ship’s crew to plug up their ears with wax and then had them tie him to his ship’s mast in order to resist the Sirens’ songs. He told the crew not to change the course of the ship under any circumstances, and he also gave clear instructions that they should not untie him. Odysseus had been warned, you see, about the Sirens by the enchantress Circe. But Odysseus wanted to hear the songs, so he took these extreme measures because he knew he was vulnerable. He had the foresight to appreciate his own weaknesses and temptations. He knew that in order to continue his long journey home, he needed to put in place a system that would prevent him from giving in. Indeed, if he had not been bound to the mast, he would have jumped overboard and drowned. From this ancient story of Homer’s we see how the first step in gaining self-control is having insight into one’s impulsive nature. Only then can one identify the correct steps needed to counteract one’s impulsivity by employing various self-control strategies.
So, if you are high in N5, make sure you have a very clear written list of all the key variables (rules) that need to be checked off before making a move in the market. Make this list in advance, when your emotions are not running high, and then make sure you use it prior to every trade you make. By doing this, you can learn to take advantage of your impulsivity (which actually can be very useful when it comes to catching a quick move in the market).
By monitoring, which I said was needed in addition to checks, I mean turn to a trusted person to make sure you are following your checklist of variables. If you are very impulsive, do not take it upon yourself to make sure you are sticking to the plan!
A good analogy is a NASA rocket. You are the one who is sitting at your desk with a finger on the red button that ignites the main engines and propels the rocket upward into space. You are waiting, and you are eager. The weather forecaster says that there is a 10-minute window of opportunity for a successful launch (placing a trade in a market). At that point do you just go ahead and impulsively press the button and fire up the engines on this multi-million dollar toy?
No! You are going to go through a very rapid, but very comprehensive and orderly, checklist to make sure “all systems are go” prior to making that final and fateful decision. Just as NASA makes its checklists far in advance of launch time and practices them over and over in simulated launches, so should you. And just as NASA modifies its prelaunch checklists based on prior successes and failures, so should you. And just as at NASA, the guy with his finger hovering over the red launch button is not the same guy who is monitoring whether the checklist is being followed to a T, so too would it be ideal if you had someone else involved to make sure you are staying on task and not jumping the gun. At least until you train yourself well, look for a trading partner to help reinforce this type of prelaunch checklist behavior.
It is often thought that one big reason why professional investors and traders, in general, outperform the average individual investor is that they are required to operate under a strict set of institutional rules and regulations. These rules allow for greater control of emotional reactions. In contrast, the private trader is often, if not always, entirely on his or her own and has no set list of rules or procedures to follow. Of course, rogue institutional traders pop up from time to time in the news, professional traders who lose millions or even billions of dollars for their firms, usually by ignoring or finding ways around the institution’s rules and allowing their emotions (greed or excitement) to go unbridled and unchecked.
Besides a checklist of rules to follow while trading, another key strategy you can employ to limit emotional reactivity (high neuroticism) is instilling “cool-off periods” into your trading behavior. In the heat of the moment, a trader can get very caught up in his market trades, so much so that the money behind his trades can start to appear abstract or unreal. Clicks of a computer mouse, ticks on a computer screen. The true value of what your trades represent can be lost in the hustle and bustle of it all. A cooling-off strategy allows you to step back, get a concrete grasp of what you are really risking and how much money is at stake, and visualize the potential consequences if things go wrong. You have to have a real sense of what the ramifications of your trading behavior could be. Things must be brought down from that abstract level and into very understandable and very real terms. Make sure to interject your cooling-off periods both before you place a trade (this may have to be very brief, perhaps just minutes, so you don’t miss the trade altogether!), and immediately after the trade is executed or exited.
Keep in mind, too, that high N scores are not all bad! Bring back to your mind the image of the bell-shaped curve. Half the human population is going to come down on the neurotic side of the spectrum, albeit some much more so than others. Does that mean that half of us cannot be reasonably good traders in the market? Probably not. It turns out that it can also be advantageous to rate high on the N scale, as long as you recognize it and take full advantage of it. People who are high in N are, by definition, more emotionally sensitive. They are potentially more able to use this sensitivity to get a “gut feeling” about market trends. But they are going to have to put more effort and attention into controlling their emotions than those with lower N scores.
Meanwhile, for the person who is low in N, although his emotions are not getting in the way of intellectual mastery of the markets, he may miss out on experiencing certain subtle and intuitive emotional cues that can be helpful in deciphering when a good trade is going bad (or when a bad trade is starting to turn good). Being overly stoic and emotionally bland can be potentially a very dangerous thing. Remember, the best traders scored average in neuroticism overall. So if you are low in N, take note!
Back to fear and anxiety. Anxiety is often what keeps us in check (both in the markets and in life). If we were totally fearless, we would probably not make out too well. The fearless are the reckless.
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