Trader Personality Test

Found a very interesting link to a FREE Trader Personality Test (MarketPsych, LLC). Hadn't taken one of these in a while. Anyhow, I thought it a good idea to share this link and highly recommend that you give it a whirl.

Anyhow, here's how I did:

Trader Personality Test

PERSONALITY FACTORS
Conscientiousness : High

Conscientiousness describes your relative ability to plan and organize towards achieving goals and to exercise self-control.

You scored in the HIGH range for conscientiousness. Intelligent activity involves contemplation of long-range goals, organizing and planning routes to these goals, and persisting toward one's goals in the face of short-lived impulses to the contrary. You can achieve high levels of success through purposeful planning and persistence. You are likely to be positively regarded by others as intelligent and reliable. On the down side, some people may see you as rigid or perfectionistic.

Emotionality : Very Low
Emotionality is characterized by stress-sensitivity and more frequent experiences of negative emotions than others.

You scored in the LOW range on emotionality. You are relatively more calm, emotionally stable, and free from persistent negative feelings when compared to high scorers. Freedom from negative feelings does not mean that you experience more positive feelings. You may be reckless in dangerous situations and take more risks than others (sometimes without knowing that you are doing so). In general you are probably secure, hardy, and relaxed even under stressful conditions.

Extraversion : Very High
Extraversion is characterized by a desire to socialize and a tendency to optimism. Extraverts derive energy from interactions with others, while introverts' interests are fueled by introspection.

You scored in the HIGH range on extraversion. You probably enjoy being with people, are full of energy, and often experience positive emotions. In groups you are likely to talk, assert yourself, and draw attention. In general you are outgoing, active, and joyful.

Openness : High
Openness to new experiences describes a willingness to experiment with tradition, to seek out new experiences, and to think broadly and abstractly.

You scored in the HIGH range on openness. You are intellectually curious and tend to be, compared to closed people, more aware of your feelings. You probably tend to think and act in individualistic and nonconforming ways. Open and closed styles of thinking are useful in different environments. An open intellectual style may serve you well as a psychologist, professor or investor. Research has shown that closed thinking is related to superior job performance in police work, sales, service occupations, and short-term trading.

Agreeableness : Above Average
Agreeableness reflects a concern with cooperation and social harmony.

You scored in the NEAR AVERAGE range on agreeableness. You are likely to balance a healthy skepticism about others' motives with a desire to cooperate and get along. You are willing to extend yourself for others and compromise, but you may prefer that they first demonstrate good will.

BIAS REPORT
Confidence Biases
Overconfidence : Very High

"One of the most strikingly evident traits of all the market wizards is their high level of confidence....But the more interviews I do with market wizard types, the more convinced I become that confidence is an inherent trait shared by these traders, as much as a contributing factor to their success as a consequence of it....An honest self-appraisal in respect to confidence may be one of the best predictors of a trader's prospects for success in the markets."
~ Jack Schwager,
Stock Market Wizards

Schwager goes on to explain that any trader who does not have "absolute confidence in their ultimate success" should be very cautious about entering the business. Yet, some traders will have excessive confidence without a grounding in reality.

Great traders are confident that they can manage whatever comes up (they are both certain and flexible), but they are also realistic and prudent (they use good money management and recognize that they can lose).

There is a risk from having too much confidence in one's knowledge and skill. This type of overconfidence typically leads to inadequate money management and the ignoring of potential risks. Put simply, overconfident traders think they are smarter than they actually are.

Technically speaking, overconfident traders misinterpret the accuracy and importance of their information (their data) and overestimate their skill in analyzing it. Overconfidence results in a tendency to underestimate trading risk and to have higher position turnover.

Men are more likely to be overconfident than women, and young adults are more likely to be overconfident than older adults. Ironically, "experts" are more overconfident than lay-people, as they often get attached to and then overweigh the predictive power of their own models. Additionally, more difficult decisions (e.g. forecasting the market) inspire more overconfidence in forecasters.

HIGH SCORERS:
If you are a high scorer, to balance your potential for overconfidence in trading, you can:

  1. Practice humility. Remember that the markets are bigger than you. No matter how well you have been doing recently, you will suffer losses if you approach the markets with arrogance or entitlement. Every day, run through the possible trading risks. If you start moving stops or are not performing adequate risk management, then stop trading until you can again approach the markets with respect.
  2. Think before you leap. If you have a problem acting too quickly on your trading certainties, then deliberately pause for a brief cooling-off period between having a strong opinion about the market and executing it. Remember, there will always be more opportunities like this one.
  3. After a string of wins, be careful of feeling that you're invincible. It's usual, after a series of wins, to feel "on top of the world." However, beware of leaving positions open while you are distracted by other things. Overconfident "hubris" is the result of a string of wins, and it nearly always leads to big losses.
  4. Engage in a more thorough evaluation of your trading data and plans. Pay extra attention to potential risks - you may have a tendency to avoid acknowledging these. In particular, remember to look at historical parallels and to perform adequate back-testing.

LOW SCORERS:
If you are low scorer, you are more likely to be realistic about your investment knowledge and expected returns. However, you may be susceptible to the following if you are “underconfident” (in the very low range):

  1. Underconfident traders may be too afraid of risk to take necessary risks. Further, they are often less successful in attracting new business. To combat underconfidence, remind yourself that you are capable and competent (assuming you have demonstrated this previously). Sometimes underconfidence is a real result of knowing less than others about the markets. In that case, be sure to gain the appropriate education and experience before risk taking.
  2. Some underconfident traders are hyperaware of risks. In this case, you should review historical investment information and notice if you are overweighting negatives and overlooking positives. Your challenge is to develop a realistic appraisal of risks and your ability to handle them. It is possible that you have a greater ability to manage risk than you believe.

Over-Optimism : High
"For myself I am an optimist - it does not seem to be much use being anything else."
~ Sir Winston Churchill, 1954.

Optimism refers to the rose-colored lenses through which high-scorers view the world. Optimism is associated with "confidence" biases because many people who are overly optimistic overestimate their chances of success (as in overconfidence). Yet optimistic people do not typically take excessive risks. They are likely to take calculated, moderate risks. Optimistic people would not want to risk losing a large sum of money (because it might jeopardize their optimism, according to researchers).

Optimistic people often avoid negative information and seek out evidence confirming their positive outlook. This search for positive confirmation is a type of denial, On the flip-side of optimism is pessimism, which characterizes low-scorers.

As with the other confidence "biases," optimism benefits businesspeople, politicians, and other professionals whose ability to attract business often depends on their attitude. However, in the financial markets, excessive optimism can lead to superficial analysis and denial of important, negative evidence.

The optimistic trader may find himself holding excessive risk in his portfolio while denying evidence of growing dangers. Many optimistic traders who believed in the "New Economy" and the outstanding growth potential of internet stocks found themselves over-exposed to the volatile technology sector in late 2000 and 2001.

Optimistic people tend to be resilient. They see possibility even after a financial catastrophe, which may explain why they are more financially successful overall. Additionally, optimistic people believe that "everything is going to work out for the best," which fosters energetic activity and success in many areas of life.

HIGH SCORERS:
If you are a high scorer, you are more likely to see the glass as "half-full," and you generally see a positive future ahead for you and the world. Your optimism is, in general, a great gift. However, in your trading, you should be careful:

  1. Don’t Deny the Negative. Learn to seek out and understand the logic of all opinions about a trade, trading system, or market events.
  2. Don't believe the hype. A good story or a good company does not make a good stock. Only invest when you have thoroughly educated yourself and you can commit to following a strict investment plan.
  3. Don’t stop paying attention to risk when things are going well. You are more susceptible to ignoring your trading risk in good times than others.

LOW SCORERS:
"My pessimism extends to the point of even suspecting the sincerity of other pessimists."
~ Jean Rostand (1894 - 1977)

If you are low scorer, you may be generally pessimistic. You might expect more negative events and may feel less effective than an optimist. You are probably more emotionally reactive to negative market feedback. To ensure your peace-of-mind and profitability, you should:

  1. Maintain an objective, nonjudgmental awareness of your negative emotions. Find patterns of emotion that lead to different types of trading behavior. Because of your extra attention to negative details, you may see more threats to your trades than opportunities. You may avoid trading entirely when you perceive signs of danger, regardless of the opportunities that are present.
  2. Consider using a journal to document your mood, the events that affect your mood, and your resulting mood-related decisions, every trading day. Trading psychologist Brett Steenbarger has an excellent website with such resources.
  3. You may take losses personally. After a series of losses, you may become excessively pessimistic and risk averse. Consider reviewing your strategy's historical performance to boost your confidence.
  4. Avoid checking on your trades, except at predefined intervals or price levels. Frequent checking leads to negative emotional reactions (and resulting bad decisions) when positions are going against you (which they occasionally will be).

Risk-taking Biases
Risk Aversion : Very Low
"You Can't Be Afraid of Risk
.

...A willingness to accept risk is probably an essential personality trait for a trader. As Watson states, 'You have to be willing to accept a certain level of risk, or else you will never pull the trigger.'"
~ Jack Schwager,
Stock Market Wizards, Wizard Lesson #16.

Risk aversion refers to an excessive fear of risk-taking. Risk aversion usually results in hesitation, indecision, and “analysis paralysis.” Many traders with high risk aversion experience difficulty "pulling the trigger." It is common among traders who have recently suffered large losses.

Some traders experience risk aversion as “waiting for confirmation.” Unfortunately, waiting for price movement to confirm the accuracy of their trading signals seriously erodes profits. Such delays can ultimately lead to “chasing” (impulsive entries and exits).

When trading a system that has not been thoroughly tested, risk aversion is appropriate. Traders should always test their systems in order to gain confidence. Sometimes losses are due to random events, and in those cases it is helpful to understand the laws of probability and the inevitability of draw-downs (an understanding derived from fully testing trading systems).

HIGH SCORERS:

  1. A high score can foreshadow a problem if you are a short-term discretionary trader. Your style of trading should take into account your sensitivity to risk. An aversion to risk may prevent the pursuit of high risk/reward opportunities.
  2. Be sure to backtest and systematize your trading strategies.
  3. Confidence can be built through continuing trading experience, gradual exposure to market risk, education, and the constructive challenging of one's fear of risk. Challenging one’s fears and gradual exposure are best done with a trained professional.

LOW SCORERS:
Very Low scorers should beware of taking excessive risk. But in combination with adequate education, historical knowledge, experience, and preparation, a low score on risk aversion is a good sign for traders.

Emotional Vulnerability : Very Low
"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
~ Warren Buffett

If you are a high scorer on emotional vulnerability, you are likely to experience panic, confusion, and helplessness when under pressure or experiencing stress. If you are a low scorer, you feel more poised, confident, and clear-thinking during stressful times.

MIT researchers Andrew Lo and Dmitry Repin performed a study of 36 online traders in 2002. They gave the traders psychological tests and had them fill-out a daily log of their emotional states and P/L at the end of each trading day. They found that the most significant predictor of trading losses is high "emotional reactivity." Moderate to low emotional reactivity predicts greater trading success.

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
~ Warren Buffett

HIGH SCORERS:

  1. Practice self-awareness. It is important for high-scorers to know when they are in a highly emotional state – without awareness, they cannot take action to halt the destructive effects of overaroused emotions. Meditation and yoga help practitioners identify and release reactive emotional states. Vigorous exercise can also be beneficial in reducing the mental effects of stress.
  2. Check your positions as infrequently as possible. Checking position progress too frequently stimulates emotional reactions without giving useful information.
  3. Stick to a defined money management plan. Know your entry and exit points in advance. Have clearly defined buy and sell signals. (These concepts are easy to acknowledge, but during periods of market volatility you will have trouble following them - know this).
  4. Consider avoiding short-term trading. You are vulnerable to emotional burn-out from rapid market feedback, especially about losses.

LOW SCORERS:

  1. You can stay more calm than most during market volatility. Nonetheless, become aware of the triggers for negative emotional states during trading. If reactive emotions are a problem for you, then see the recommendations above.

Holding Losers too Long : Low
"To Be a Winner You Have to Be Willing to Take a Loss."
...'You can't be afraid to take a loss. The people who are successful in this business are the people who are willing to lose money.'"
~ Jack Schwager,
position Market Wizards, Wizard Lesson #14.

"Cut your losers short" is an old Wall Street adage. It addresses a common trader error - the tendency to hold losing positions too long. This is the single most common and costly mistake traders make.

Most traders avoid thinking about losing positions, and typically they hope for a “comeback” so they can exit the trade at “break-even.” Ironically, if a trader is bailed out by the market, they tend not to learn from their mistake, leaving them more vulnerable to later losses.

Most “Rogue Traders,” including Nick Leeson (Barings) and Toshihide Iguchi (Daiwa Bank), who both lost over $1 billion, could not muster the courage to bail out of losing positions in the beginning, and then they developed illegal techniques for hiding their snowballing losses.

The trader Brian Hunter lost $6 billion on natural gas spreads in 2006 at Amaranth Capital. Previously, he had caused a near collapse of the fund in May 2006, but by holding onto his losing positions in May, he turned a near disaster into a large gain during the summer. The second time his positions reversed in Fall 2006, he was not bailed out by market events, and the fund collapsed.

One of the three tenets of the 2002 Nobel-prize winning theory of economic decision-making called “prospect theory” is that people avoid taking losses, even when that avoidance will likely lead to larger losses later. For example, when faced with the choice between (1) losing a definite amount of money, or (2) gambling on a "come-back," most people prefer to take the gamble. Most people will choose the gamble even when they know that the odds are objectively against them.

"Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong."
~Bernard Baruch, Financier

One's baseline level of loss avoidance can change. After experiencing a recent loss, most traders will become more loss averse. Losses of any kind have this effect - the death of a loved one, divorce, illnesses, accidents, work-related losses, and financial losses - all increase the propensity.

"...Tenacity without flexibility is no virtue."
~ Jack Schwager, Stock Market Wizards

HIGH SCORERS:

  1. Ask yourself, "All things being equal, would I enter this position today?" If your answer is "no," then place it on your sell list.
  2. When in a losing position, beware of thinking, “I’ll just wait and see what happens.” Notice any rationalizations or excuses you make in order to hold a losing position longer.
  3. Keep track of your Win/Loss size ratio. Many traders aim to have more winning trades than losing trades. More importantly, they should also be keeping track of the size ratio of their winning to losing trades. Your ratio should be more than 1.
  4. Also monitor the length of time you hold your losing versus winning trades. Most traders hold losers longer while they are waiting for a comeback.

LOW SCORERS:

  1. Remember that you are still susceptible to holding onto losing positions, especially after recent or large losses.
  2. As always, be sure to follow your stop-loss rules. If you don't have a defined money management system, then be sure to put one in place.
  3. When new information changes your assessment of a position, be sure to re-evaluate it. Would you buy this position now?

Cutting winners short : Below Average
"Selling companies that are doing well and purchasing ones that are faring poorly is like watering the weeds and cutting the flowers."
~ Peter Lynch, Fidelity Investments

For professional traders, the instruction to “let winners run” has become commonplace. It is necessary because many professional futures traders sell their winning trades too soon (as shown in academic studies). Furthermore, active stock traders, typically holding positions over months, are even more likely to cut their winners short.

Some traders disagree that this bias is a problem. They find it beneficial to cut their winners short so that they can move their time and attention to finding the next trade - as in this potentially sound advice for traders: "You’ll never go broke taking a profit."

High scorers are more susceptible to this bias. Experience and education may eliminate your vulnerability. If you notice yourself cutting winners short consistently (you can determine this by looking at your win/loss profit per trade ratio or win/loss time held), and it is eroding your profitability, then try to understand what feelings are driving you. Do you feel desperate to lock-in a gain? Are you afraid of giving the paper profits back? Do you want to feel proud of your profits? Answering these questions can help you unlock your motivation for this behavior.

Impulse-control
Self-discipline : High
"One trait that was shared by all the traders is discipline."
~ Jack Schwager, Stock Market Wizards

Self-discipline is what many people call will-power. Self-discipline refers to one's ability to persist at difficult or unpleasant tasks until they are completed. Self-discipline is correlated with wealth level. When undisciplined people are financially successful, it is often because they have a disciplined person supporting them (an employee, spouse, or assistant).

In a survey of 200 currency traders in continental Europe, self-discipline was rated the second most important factor in trading success. (The most important factor was quick reaction time).

"Every winner needs to master three essential components of trading: a sound individual psychology, a logical trading system, and a good money management plan."
~ Alexander Elder, Trading for a Living

HIGH SCORERS

  1. Self-discipline is a great asset for your trading, but be careful not to over-control your positions. The markets can be very disorganized and evolutionary, and in order to trade well, you’ve got to have some comfort adapting to uncertainty.

LOW SCORERS

  1. One key to success is the ability to meticulously analyze one’s performance. What factors led to a successful trade? What happened to cause an unprotected loss? Self-discipline is necessary for collecting and organizing this information.
  2. In order to build self-discipline, start by getting motivated. Notice the importance of discipline in your life. If there is little consistency between your stated intentions and actual behavior, then you may be considered unreliable and even untrustworthy by others.
  3. Practice being "your word." When you say you that will do something, then you have made a commitment. Keep your commitments. A good way to start is to always be on time. A hallmark of undisciplined people is being late to appointments.
  4. Don't get ahead of yourself. If you have low self-discipline, then address this problem with small, do-able steps.
  5. In trading, it’s important to be able to mentally understand and plan for various contingencies before entering your positions. Identify the area of your trading where self-discipline would be most helpful, then begin a gradual program of improved organization and structure. Coaches can be very helpful in keeping you accountable here.

Immediate Gratification : Below Average
"Business opportunities are like buses, there's always another one coming."
~ Richard Branson

“Immediate gratification” is the preference for small, immediate rewards over larger, more distant rewards. People who “eat dessert first” are giving in to immediate gratification urges. Impatience is characteristic of high-scorers. Traders who score highly here should beware of impulsive trading.

HIGH SCORERS

  1. Remember Richard Branson’s quote above – it is true for the trading business as well. Patience is a cardinal virtue of traders.
  2. Beware of excess leverage and chasing fast-moving stocks (e.g the “most actives”).
  3. Widen your time-perspective when feeling impulsive, and re-orient yourself to your original plan. Looking ahead can diminish your urge to trade impulsively now.

LOW SCORERS

  1. If you have trouble reining in your impulses, then see the advice above.

Excitement-seeking : High

"The key sign of gambling is the inability to resist the urge to bet. If you feel that you are trading too much and the results are poor, stop trading for a month.... If the urge to trade is so strong that you cannot stay away from the action for a month, then it's time to visit your local chapter of Gamblers Anonymous."
~ Sonny Kleinfeld, The Traders

Excitement-seeking describes the tendency to pursue emotionally arousing activities. Excitement-seeking is seen in risk-takers who make large bets more for the thrill of the potential gain than out of an understanding of the game.

Excitement-seeking is generally detrimental to trading activities, and high scorers may pursue emotional excitement over prudent trading tactics.

It is important that traders enjoy trading, but trading must remain a business. When price action and P/L fluctuations become thrilling to a trader, then problems may arise. To maintain balance, traders should enjoy following a well thought-out plan more than the pursuit of profit or the avoidance of loss.

HIGH SCORERS:

  1. High scorers are more susceptible to gambling for pleasure (unnecessarily taking high risk positions). If that is true of you, then you should either stop trading or use a small account to gamble for fun (one whose wins and losses will not significantly impact your assets). Some of the "Market Wizards" have small gambling accounts which they use for highly speculative bets.
  2. If you find a new opportunity, then take the time to do due diligence.
  3. You have the potential to be a good trader, as long as you watch the downside as well as the up. Sound money management is 90% of trading success (the other 90% is psychology, so they say).

LOW SCORERS:

  1. For some low scorers, motivation is a challenge, but their trading is more likely to be appropriately deliberate and structured.

Intellectualism
Intellectualism : Above Average
"An intellectual is a man who takes more words than necessary to tell more than he knows."
Dwight D. Eisenhower (1890 - 1969)

Intellectual traders are interested in complex concepts and abstractions. They may enjoy understanding and modeling complicated intellectual problems. Both high and low intellectualism scores can be an asset or a liability for traders, depending on the context.

In trading, high intellectualism may lead to gathering "too much information" and "over-thinking." A hallmark of the intellectual trader is the use of complex analytic techniques. Intellectual traders should always understand the general principles underlying their preferred strategies. Intellectual curiosity can be helpful, but an over-reliance on details is distracting and potentially dangerous. Psychological research demonstrates that gathering more than 3 pieces of decision-relevant information leads to deteriorating decision quality.

Traders who are low scorers on intellectualism can more easily remain focused and without distractions or tangents in their thinking. “Very low” scorers may not feel curiosity about new trading techniques, which can reduce their performance if market conditions change.

HIGH SCORERS:
""Nothing contributes so much to tranquilizing the mind as a steady purpose - a point on which the soul may fix its intellectual eye.""
Mary Wollstonecraft Shelley (1797 - 1851)

Intellectual traders may have trouble with mind wandering. Their endless curiosity about new trading systems or models may hamper the disciplined operation of their trading business.

  1. Be careful to avoid getting caught up in details about your trades or systems.
  2. Don’t think you’re smarter than the market – remember to maintain a sense of humility (often difficult for intellectual experts).
  3. Notice if you are "missing the forest for the trees." Successful trading doesn't have to be difficult or complicated. Many people consistently beat the market with strategies that are simple but consistently executed.

LOW SCORERS:

  1. Use strategies that make sense to you. Low scorers perform best when methodically studying tried-and-true methods. Be wary of relying on unsophisticated or unreliable sources for research.
  2. One problem with low intellectualism is a tendency to continue using a strategy even after market conditions have changed and it is no longer profitable. Maintain an awareness of the larger economic trends that may impact your trading space.

Herding
Trend-following : Above Average
"If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, then you have no chance of making money trading."
~ Alexander Elder (1993)
Trading for a Living

Trend-following refers to one's tendency to follow the crowd, relying on others to determine market leadership and perform critical thinking. Trend-following can be profitable for traders (though many contrarians would disagree), provided that they recognize signs of trend formation and dissipation. Momentum traders are an example of trend-followers. Contrarians score low on trend-following. Contrarians tend to bet against current trends or opinion when they are identifiably incorrect. Contrarians typically view the market consensus with suspicion, and are sometimes seen as congruent with swing or counter-trend traders.

"Never, Ever Listen to Other Opinions."

To succeed in the markets, it is essential to make your own decisions. Numerous traders cited listening to others as their worst blunder. Walton and Minervini lost their entire investment stake because of this misjudgement."
~ Jack Schwager, Stock Market Wizards, Wizard Lessons #29

HIGH SCORERS:

  1. Consider using a trend-following strategy in your trading.
  2. Avoid listening to financial media outlets such as CNBC for trading ideas, unless you are planning to be a contrarian. High scorers are more susceptible than most to jumping onto the media bandwagon or following stock tips (which is typically a very bumpy ride).

LOW SCORERS:

  1. You have the innate advantage of searching for opportunities away from the crowd. Trading in overlooked markets or sectors may fit your personality.
  2. Beware of betting against powerfully trending markets. Betting against trends may be appealing to low scorers, but doing it well requires patience, vigilance, and knowledge of the signs of reversal. Timing is key.

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Fixed Ratio Money Management

It's been a while since I last blogged about Money Management, what many consider to be the most important yet overlooked subject in trading. As one of the three (3) pillars of trading success (the other two being Mind and Method), I therefore feel that I have an obligation to share more of my thoughts on the matter.

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