Trading Personalities

By: Wendy Kirkland

The following is an excerpt from Wendy Kirkland's Stress Free Wealth Building

Party Crasher: In this scenario a trader watches Bloomberg or CNBC on TV and hears that the market, or a stock, or a whole sector is making a big move.  A TV analyst-anchor confidently offers an explanation of why the move is occurring, and the trader becomes afraid that “because he was not invited he might miss the party” and rushes his decision to purchase an option position without ever doing the needed due diligence on the equity itself.

Another aspect of fear shows up when the newbie trader asks for advice and tips from friends, other traders, or Uncle George, but doesn’t do his own confirmation.  In other words, he doesn’t feel confident because he hasn’t checked out the information on is own to either confirm it or find the down side.  Fear raises its ugly head because he’s not confident that he knows what to act on and what to disregard.  Still, he’s afraid of missing out.

Fear of Loss: In this example, the trader makes the decision to exit an option trade as soon as he sees the slightest blip.  After all, if a trade loses any ground, it means that he’s made a bad choice and surely the stock and its option will spiral downward.  Better to get out now before any loss gets worse.

This nagging fear also can show up when a trader holds a losing position for far too long in the hope that it will eventually come back up.  If he sells at a loss, it’s as if he admits defeat.  This is compounded when a spouse or friend looks on – it’s like having an authority figure standing over his shoulder.  The trader’s fear forces him to bend to the pressure he feels because that significant person will know “he’s failed.”  Unfortunately, outside accountability can smother good decision making.

Fear of Losing Profit: In this circumstance, a trader holds a winning position much too long.  He may actually watch a spectacular profit dissipate well after the equity topped, hoping there will be even greater profit.  Because of fear, a 150% profit last week erodes or becomes a loss the next week.

Fear of Decreasing Profit: In this scenario, fear might nudge a trader to close a profitable option position too soon.

A note to keep in mind is that among traders, fear moves twice as fast as greed.  How do I know that?  Well, an option position will drop much faster than it rises.  As fear urges stock investors to sell off their positions, the price may drop in two or three days – an amount it took two or three weeks to build.  However, if a position is held on “cream-of-the-crop” equity, it will rise again if there is time to do so before expiration.

Sometimes it’s difficult to hold on to the image of success.  That’s when fear and doubt sets in.  Fear that I won’t make it.  What makes me think I can do this?  How do I get past all these doubts?  The answer is study, practice and remembering that fear is an illusion.  It isn’t real.  You will also discover that there are a lot of support systems in place like continued education, trading groups, and chat rooms.

Greed – The Seed of Discontent

Greed can ruin a trader’s opportunity for success by bringing results similar to those brought about by fear.  Imagine this – you might think you want just another $400 out of this option before you trade.  Greed always pressures to get a little more.  If you reach your $400 goal, the “greed” voice shows up to whisper in your ear again, pushing for further gains until the equity plunges with an adjustment in price.

I’ll bet all of your life, someone, somewhere, has warned you about “a bird in the hand.”  Well, here it is again.  Be happy with the goal you set on the trade and congratulate yourself for following the rules.  Greedy traders often get into trouble by putting too much money in too few option opportunities.  Why would a trader do this?  Usually to multiply the position result because he’s looking for that “monster trade”, the big score.  But this is a way to cut short a potentially great trading portfolio.

Which Trading Personality are You?

Aside from fear and greed, you also need to know yourself and your unique trading style.  We all have distinct likes and dislikes, and trading styles and “personalities” differ too.  The strategies you prefer and the way you trade must be akin to your personality.

Trader A: This trader buys an option with an expiration date six months out, but this strategy is not active enough to keep his interest.  He quickly becomes bored with trading and drifts away before he’s had a chance to reap the benefits.

Trader B: Now, this trader calls himself a “day trader”, meaning that he enters and exits options on the same day.  This is on the opposite side of the trading pendulum (and gets considerable attention because day traders have a reputation of living “on the edge”).  As a trading style, day trading demands constant attention to charts, and the trader must make decisions quickly.  This hectic pace trading can be exhilarating to some traders and stressful to others.

If you thrill at the thought of fast pace action and are good at making snap, frequent decisions, day trading might be the perfect fit.  On the other hand, if you’re much more comfortable making well thought out decisions, you probably wouldn’t enjoy watching your positions change minute by minute.  For many, this would create unbearable stress.

For many, middle-of-the-road or moderately longer term position trading fits best.  Trading ought to feel comfortable and natural.  If you try to adopt another trader’s style, in effect you’re trying to be something you are not and it will never work.

No two traders are exactly alike.  Your comfortable trading personality, your trading “posture,” will likely reveal itself as you read through educational trading material and practice before you invest the first penny.