Saturday, June 20, 2015

How my trading approach suits my personality

We as individuals all have our own personality traits and characteristics. Sometimes you have to learn and overcome some of the issues these can create. However, sometimes a way forward can be shaped which embraces these traits.

As a child I was always very impatient. If something didn’t go my way, or if I didn't show some improvement, I’d quickly lose interest and move on. Typical of a young boy, I’d try many sports and activities – those where I’d show some aptitude, I’d carry on doing. Those I didn’t I wouldn’t bother with any more.

This personality trait has followed me through into adulthood and consequently my own trading.

When I first started out day-trading twelve years ago, the quick ‘in-out’ nature of the trading appealed. However, it soon became apparent that another personality trait was impeding me.

While I am impatient, I am also quite analytical. This meant I was too hesitant in pulling the trigger when an opportunity came along. I would want to make sure that everything lined up, and with day trading, being able to pull the trigger almost without thinking at the right (or wrong) time would make a significant difference to your profitability.

I soon came to the conclusion that the day trading approach was not for me, so the question was how I could trade that could:
  • give me enough ‘action’ without becoming too impatient;
  • give me enough time to think and act.
A lot of trend following methods are geared to holding positions for several months, or maybe even a year or more. Generally these methods use weekly charts, or use very long-term entry/exit parameters, and I quickly found out that this didn't suit my impatient personality. However, the basic logic of the approach did appeal to me, as it suited my skill set. Maths was my strongest subject at school, so I was able to easily grasp the concepts of expectancy, risk:rewards etc., and understand how you could win even if you actually lost on the majority of your trades.

My research on trend following quickly became concentrated on what Richard Dennis and the Turtle traders did, as well as people like Richard Donchian and Ed Seykota. By going through this process, I found the right timeframe and entry/exit parameters – for ME, along with an approach that utilised my mathematical skills.

This then gave me enough ‘action’ to be regularly engaged or involved in the markets - it was at the shorter-term end of the trend following scale, and that helped keep my impatient tendencies at bay. And, at the same time, because of the timeframe and rules I followed, the issue about not being quick enough to react to new opportunities was eliminated.

Using a clear set of trading rules or framework helped me. It was difficult at first, but it quickly started to became second nature, and I'm sure that was due to the method suiting my own personal characteristics.

The changes I made to my stop methodology in 2012, making it even more impatient towards losing trades, again suited my personality – as well as reducing the average size of my losing trade. So that was a win, win change for me.

One important point to note - my inherent impatience did not extend to me switching from one method to another. Because I was quite analytical, any approach I used was going to have to be logical and make sense to me. And there was one important similarity between what I was trying to do as a day trader, and what I do now as a trend follower - buy on new highs, and go short on new lows. The difference obviously is that, instead of trying to apply it on a 1 minute chart, I am using daily charts. And in addition, I also now have an exit strategy, proper risk management and factor in volatility for position sizing purposes - none of which I had as a day trader.

It was only when talking to a student last weekend about my recent NLP and mindfulness post, that it reinforced to me why my trading approach suited my personality so well. When undergoing the NLP sessions a while back my general impatience was discussed, but only thinking about it more now, has made me realise WHY I am 100% comfortable with my basic approach, and why I was never comfortable looking for and trading longer-term trends. In essence my personality traits were subconsciously used as building blocks for my own trading approach. And it is because I am fully ‘compatible’ with what I am doing, that I can follow my rules without question.

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