What Is The Best Personality Type For Trading? (Analyzing who Succeeds As Traders – Introverts Or Extroverts)
Traders might have different personality traits. What is the best personality type for trading? Most traders focus on finding a trading edge in the market by developing good and robust trading strategies. But many neglect one very important factor for good returns: understanding your personality type.
We believe introverts are more likely to succeed as traders than extroverts. Knowing what personality trait is your most dominant might help your trading career. The article discusses introvert and extrovert traders and their pros and cons.
As a trader, you can gain an additional edge in the market by knowing yourself. Not only are you better prepared, but you get a better understanding of what kind of strategies you can execute equally well in both good and bad times.
In general terms, we believe introverts have a better chance of surviving the learning curve and later prospering.
The only asset in trading is yourself – you better understand what makes you tick
Most novice traders entering the financial markets expect to make good profits as long as they have solid and robust trading strategies. Little do they know about the behavioral mistakes they are guaranteed to make frequently. The problem is that even by having the best trading strategies in the world, they are useless if you can’t execute them properly!
Even with the best trading strategies, it’s not given you will profit from the strategies. It all depends on your ability to execute the strategy. It all looks easy on paper and in backtests, but the reality is that you will do many mistakes along the way, which reduces the trading profits.
Trading is difficult. To succeed takes both conviction and commitment. Many fail because of their inability to understand themselves.
Juel Anderson writes in Poker, Sex, and Dying that the only asset you have is yourself. In trading, you make your own rules, but make sure they fit your personality.
Understanding your personality is paramount to becoming a successful trader. Emotional and psychological strength is the most important factor in trading success. This article explains how you can go about getting to understand yourself.
What are behavioral biases?
Behavioral biases are another label for cognitive biases. These are systematic patterns or deviations from rational decision-making. For example, many tests have shown that almost everyone is risk-averse by maximizing losses and minimizing gains.
Another bias is anchoring. Traders tend to anchor stock prices and look at where the price was yesterday. A somewhat similar bias is the recency bias which makes us focus on what has happened recently and neglect important events further back in time.
And who doesn’t seek confirmation bias? We look for sources and people that confirm our ideas and philosophy instead of looking for more valuable sources that might contradict our beliefs. Twitter is a perfect example of confirmation bias. We follow people we agree with and block people we disagree with. This is not a good way of learning and adapting.
System 1 and System 2 thinking
The number of biases is almost endless. Daniel Kahneman and Amos Tversky have become world-famous for their work on biases. In order to get a better understanding of both yourself and the markets, we recommend reading Kahneman’s Thinking, Fast And Slow, and Rolf Dobelli’s The Art of Thinking Clearly.
Kahneman believes we can divide our thinking into two buckets. The first is intuitive and automatic (system one). The second is rational, logical, and slow thinking (system 2). Traders must use system two to develop trading systems and strategies, while system one can help us taking ad-hoc and intuitive decisions on the spot.
Rolf Dobelli’s book is an easier read than Kahneman’s and explains in an entertaining style 100 different biases.
Why it’s important to understand your personality type in trading
The best personality type for trading can handle these issues:
- How do you handle stress?
- How do you deal with uncertainties?
- Can you cope with losses?
- Are you humble?
- Do you get euphoric after substantial gains?
- Can you detach from money?
- Are you patient?
- Do you prefer decisions based on analysis or gut feelings?
- Are you flexible and willing to change?
- Can you admit defeat or being wrong?
If you’re confident that you will succeed in the long run, you might not buck under for inevitable losses. As a professional, you must make objective decisions regardless of the situation.
The problem is that fear, greed, and adrenaline interfere almost daily. You need to understand your emotions and what drives your decision-making to offset the risk of falling into all these mental traps.
If you don’t understand your personality traits, you are more likely to make grave behavioral mistakes. To trade well, you need to understand yourself. Otherwise, the market will teach you expensive trading lessons.
What is an introvert? Can an introvert become a trader?
Merriam-Webster defines an introvert as someone who is characterized by introversion, someone who is reserved, shy, and likes spending time alone.
Typically, an introvert doesn’t seek attention and often feels exhausted after social engagements. They like to keep in the background. When they get things wrong, they tend to blame themselves and generally want to ensure it will not happen again.
Because of this, introverts often have a personality style that finds it hard to execute trading signals, despite being analytical, disciplined, meticulous, focused on details, and like doing research. When it comes to risk-taking they tend to be risk-averse.
What is an extrovert? Can an extrovert become a trader?
Extrovert means “turned outward”, according to Merriam-Webster, which means extroverts are talkative, optimistic, social, and like having people around them. Extroverts get bored quickly, and they need stimulation. They are mentally “aggressive”/competitive, like going to parties, and are more willing to take risks than introverts (precisely because risks keep them stimulated).
Typically, extroverts are more prone to take risks than introverts, they like to use their gut feeling, they crave action and stimulus, and are usually impulsive.