Online Investing Tips – How To Learn A Trading Type

March 26, 2010

Do all online investors have the same trading style? Or have the same personality? Of course not. Then why do we so easily overlook how these different personality styles may affect the outcome of our trading?

It is exactly these personality styles, with their strengths and weaknesses, that are responsible for our repeatedly making the same kinds of good or bad trading judgments. And yet understanding our basic style of trading is often disregarded or taken for granted.

We may think, “That’s just how I am,” and so we don’t really question whether “how we are” may be getting in our way of being more effective online traders. This is where some personal insight as to our style is useful. Because when we are aware of our own tendencies to lean one way more than another, we can consciously take them into account and compensate for them if we choose.

HOW DO WE LEARN A TRADING TYPE?

The following trading styles are based partially on character traits that develop from childhood. While there may be a genetic component to the early shaping of our character, it is largely learned from parents and shaped by the early environment.

A trading style is also shaped by our early experiences with money and the meaning money has played in our lives. Trading decisions resulting from these styles are influenced by how secure we feel in the present, where we are in our lives financially, how we imagine our future to be, and our short- and long-term investment goals.

We need not delve into the past here to analyze the foundation of personality traits. For our purposes, we shall simply identify the trading styles shaped by it.

Remember that favoring one trading style over another doesn’t preclude changing our style. For some, it just may be more difficult, because it means fighting our natural ways of thinking and behaving. But it is never impossible, just as changing habits in other areas of our lives is never impossible.

We will see that each of these styles seems to fit best with a particular type of trading¡ªwhether it be active trading, short-term position trading, or occasional trading with an intermediate- or long-term orientation.

If we wanted to create the “perfect” balanced trader, however, it may be that a combination of behaviors from differing styles is most desirable for a particular kind of trading. I believe this is actually the case, especially for those interested in active trading. But, as we said, because those with one style of trading tend not to easily acquire traits from another style, it is tough for anyone to have the all-inclusive, balanced traits that may prove to be ideal.

For example, those who are cautious, conservative, and tend to be disciplined investors have trouble developing the required chunk of the gambling-impulsive style, which would make them better able to take risks and more comfortably execute short-term trades. Or gambling types may have trouble learning the necessary discipline to make reasonable, well-thought-out, intermediate-term trades.

To repeat, the important point here is this: When there is a mismatch (for example, long-term investor types want to start active trading), they need to realize they will have a tougher time than if they have the personality traits that are suited for day trading. They will have to fight against what is their basic inclination.

People whose trading style is opposite the traits required for a different approach usually aren’t interested in that style. For example, those who hate being focused on a computer screen watching quotes go by for long periods of time simply won’t entertain the idea of being frequent traders. If they do trade a lot, they refuse to watch quotes and just put in limit orders to buy and sell at set prices. They realize they can’t tolerate the “boredom” of watching numbers for any length of time.

Another example: some have an interest in the flashing quotes, but are too hounded by anxiety to sit for very long and watch how much money they may be losing. Those who tend to be highly anxious don’t do well even when the market is rising. They tend to see doom right around the corner. They are not very successful at climbing the proverbial “wall of worry” that the market erects. Like the soldier in training who tries to scale the obstacle wall but flops back, they just can’t seem to make it over the wall of worry.

They often err in selling their positions prematurely when they have made some profit, rather than risk losing it. What they give up, of course, is the chance to make even greater profits should the stock keep rising.