Trading Psychology: Understand Your Trading Personality Profile

Why It Is Essential to Understand Your Personality In Trading?

Your trading personality profile is very crucial for you, especially when you are still in the learning process for trading consistently. By understanding your personality in trading, you can focus on learning strategies that have the highest potential to provide you with profits. You already know that learning trading is difficult on its own. So, the last thing you need to try and learn strategies that will never be useful for you. Once you have learned at least one trading strategy, your trading personality profile becomes less useful. Around this time, you can already understand the process and mindset to master a strategy. You are also able to apply it to strategies that are ideal for your trading style.

Keep in mind that trading is not all about calculation and analysis. You must be intelligent and understand a situation accurately to predict the forthcoming events.

It is essential to understand your personality when it comes to trading because –

1. Psychology is crucial in trading.
2. It helps you understand the problems you are most likely to face.
3. It allows you to choose the right asset to trade.
4. You can develop a trading strategy that fits you the best.

What to Determine in Your Personality To Succeed In Trading?

You can breakdown the trader personality profile into four core areas, each with three sub-categories, such as –

Trading Timeframe: 

First, you need to understand which timeframe is best for you. Most traders fail in trading because their trading timeframe does not match their lifestyle and personality. After taking a course, they make the mistake of following the advice of the instructor blindly. For example, if the instructor says that swing trading is the best, they will follow it. Do not make this mistake and think for yourself. Keep in mind that you can make money with any timeframe. Longer timeframes indeed give fewer trades, but you can compensate by adding more strategies and trading more pairs.

The timeframes are:

1. Day trading (D): The trades last anywhere from a few seconds to a day. Better for a fast thinking and decision making person, that is ready to use hotkeys and adapt to changing environment quickly. Use news feed and short term (1m, 5m, 15m) charts for this tradingstyle.
2. Swing trading (S): Traders can stay in trades anywhere from a couple of days to a couple months. You should choose swing if you’re ready to hold positions overnight but cannot wait for years till your trade gets profitable. Use hourly charts to enter the trade and daily charts, when holding position.
3. Position trading/investing (P): These trades can be held anywhere from a few months to a few years. This is a perfect fit for a long term investor with a strategic view, less free time and more money to invest . Use fundamentals, long term thinking and weekly/monthly charts.

Defining your timeframe is very important. If you are a busy individual, then day trading is not for you. However, if you feel nervous about open trades, then you should go for day trading because you can close out the trades at the end of the day.

It is also important to consider your lifestyle as a trader before choosing the timeframe. If you spend your time traveling and most of the time you are outside, then swing or position trading strategies are probably best for you. However, if you like to be excited by facing new trading days with clean slates and trading for a few hours, then you should work on day trading. There are exceptions, of course, but this is the general rule of thumb.

Trend Or Countertrend: 

When you are entering trades, you need to consider the type of chart pattern most suitable for you. Even fundamental traders have their favorite chart type usually.

Your options are –

1. Trend (T): You look to trade with the trend.
2. Countertrend (C): You look for a point where price changes direction on the chart.

There are strategies that you can classify in more than one category. Yet, you must try your best and define these terms so you can understand them well and classify yourself according to them. You can view an example of every category in the chart below. The ability to change your bias from bullish to bearish also can be a part of your image

Type Of Analysis: 

Next, you need to consider the type of trading strategy that makes sense to you the best. Some traders rely on fundamental (F) analysis primarily, and some make trading decisions by relying on technical (T) analysis. Then some people use a bit of both. There are very rare cases when traders use an equal balance of fundamental and technical analysis. In our opinion, the balanced (B) analysis is the best one.

Risky or not

 The risk level can be defined in three categories, such as:

1. Low (L): Risk less than 1% of trading account in each trade
2. Medium (M): Risk between 1% and 2% of trading account
3. High (H): Risk more than 2% of account per trade

It is the best for most traders to trade with low to medium risk. At least beginners must follow this. However, after testing, if you see that you can trade a high-risk system and can also handle the drawdowns, then go for it in a small live account. At the end of the day, you should do what works for you best. If you have plenty of backtesting data, you can plug it into the calculator. By doing this, it is easy to figure out how much a trader should risk per trade to avoid his/her drawdown.

Now, all you need to do is take the first letter of each classification and form your trader personality profile by putting this together.  

Bottom Line

Strictly remember that you must give ample consideration to your trading personality profile, so you do not end up filling up what you want to be in place of what you actually are. Sometimes, what actually works for us is different than what we want to become. For example, a trader may think that day trading is exciting and thus, wants to be a day trader. However, he/she may have a demanding job and a family with kids to take care of. So, according to his/her lifestyle, swing trading is a better option. 

However, if you are not sure about what you should do, then you can open a demo account. Use this account to take trades from all categories at the same time. You can continue doing this for a month. At the end of the month, you can figure out which one works best for you so you can go with that. It is vital to choose exactly the right one. You can also make changes later if your personality or lifestyle changes. The bottom line is, never try anything by risking your real money before testing it.