How to Become a Successful Trader: The Trading Personality Profile: Your Key to Maximizing Profit with Any System

How to Become a

SUCCESSFUL

TRADER

THE TRADING PERSONALITY PROFILE:

Your Key to Maximizing Profit with Any System

NED GANDEVANI, PHD

Copyright © 2017 NED GANDEVANI, PHD.

All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means—whether auditory, graphic, mechanical, or electronic—without written permission of the author, except in the case of brief excerpts used in critical articles and reviews. Unauthorized reproduction of any part of this work is illegal and is punishable by law.

ISBN: 978-1-4834-6884-6 (sc)

ISBN: 978-1-4834-6883-9 (e)

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Lulu Publishing Services rev. date: 04/27/2017

Contents

Acknowledgments

About The Author

Chapter 1 Introduction

Chapter 2 The Two Pillars Of Successful Trading

Chapter 3 Personality Traits

Chapter 4 The Big Five

Chapter 5 What Is Your Trading Personality Profile?

Chapter 6 Openness: The O Domain

Chapter 7 Conscientiousness: The C Domain

Chapter 8 Extroversion: The E Domain

Chapter 9 Agreeableness: The A Domain

Chapter 10 Neuroticism: The N Domain

Chapter 11 Trading Personality Profiles

Chapter 12 Trading Decision Traps: Heuristic-Driven Biases

Chapter 13 Trading Decision Traps: Frame Dependence

Chapter 14 Why Can’t You Pull The Trigger?

Chapter 15 Trading Insight Versus Trading Knowledge

Chapter 16 Maximizing Your Trading Performance

References

I dedicate this book to my wife, Mieko, and my three lovely daughters: Ariana, Analisa, and Malisa.

ACKNOWLEDGMENTS

I would like to acknowledge all my students and good friends who have given me an in-depth look at and greater insight into trading psychology. I also would like to thank my family, who encouraged and supported me through the completion of this book.

ABOUT THE AUTHOR

Ned Gandevani, PhD, is the program chair for the master of science in finance at New England College of Business (NECB) and an adjunct graduate finance professor at Harvard University. He has extensive experience in academia and industry in the field of finance and risk management.

His academic background encompasses twelve years of on-ground and online teaching experience with universities across the country. Prior to joining NECB, Dr. Gandevani served as dean of business and management at a national university, leading both undergraduate and graduate programs.

As a professional trader and hedge-fund manager, he’s spent more than twenty years developing quant systems and macro strategies in creating investment portfolios. He’s trained and coached many professional traders and hedge-fund managers for more than a decade on utilizing different asset classes, including futures, options, and Forex, to maximize their trading performance. Moreover, his groundbreaking theory and approach to trading psychology, the Trading Personality Profile (TPP) test, has helped traders to optimize their performance while minimizing potential losses.

An avid researcher, Dr. Gandevani has written more than forty published articles and essays and four published books on investment, finance, business, and investment psychology. He has presented at different conferences and seminars and has been featured in such national publications as USA Today, Stocks and Commodity Magazine, Futures, and others. He is a contributor to several prominent financial blogs, such as Seeking Alpha and GuruFocus. Dr. Gandevani is a member of several prominent professional associations, including the American Finance Association (AFA), the Society for Quantitative Analysts (SQA), and the American Management Association (AMA). He is an affiliate member of the Market Technicians Association (MTA).

CHAPTER 1

INTRODUCTION

I n the course of my research for my master’s in business administration, I looked deeply into the efficient market hypothesis and the random walk theory. After examining these theories and their bases, I began to uncover discrepancies between them and how the markets are really influenced. The efficient market hypothesis promotes the idea that rational investors drive the markets; my research into this theory revealed that nothing could be further from the truth.

It quickly became clear to me that the best approach to explaining market behavior was the chaos theory. When studying chaos theory, I explored the dynamic systems theory and realized that the markets were really a dynamic system driven by certain internal characteristics; I call this system internal dynamics. At the same time, my research also led me into the world of behavioral finance. This field was relatively new at the time, yet it provided plausible explanations for market behavior that complemented my research of such behavior using the chaos theory and the dynamic systems perspective.

While working on my PhD in finance, by looking at the study of dynamic systems—in particular, internal dynamics of market movement—in the light of my thesis, I was able to create and develop a discretionary trading methodology exclusively for the S&P that I now call the Winning Edge Systems. Throughout this process, I delved deeply into human psychology and the role it plays in investing and trading.

In late 1995, I put my theories of market movement and the tenets of my thesis into action. I firmly believed that, if my research and resulting theories were to have any validity or practical value to the investment and trading world, then I would have to prove them in real-time market trading and under the most strenuous of market conditions. I chose the S&P 500.

For the next year, I did extremely well trading in accordance with my Winning Edge Systems. The winning percentage was high, the profits were consistent, and my losses were relatively small. However, after about a year or so, I realized that my performance was beginning to drop off. This was strange. I knew the markets had not changed; I also knew that my trading methodology had not changed. I knew exactly what to do based on my methods, and they had proven themselves to be profitable. The real problem was that I started second-guessing my methods. The only variable in the equation that was left unquestioned was the trader. Had I somehow changed? Was it my perspective that had changed? What had happened? What was different? After some introspection, it was clear to me that I was experiencing firsthand the effect of my own psychological makeup on my real-time trading performance.

From that point forward, I proceeded to research and investigate psychology and the resulting impact it had on a trader’s performance. I read every book that I could find on trading psychology, although not many had been written by traders and for traders. Almost all the books I read on trading psychology were merely speculative, and they did not contain much in the way of real substance, practical applications, or techniques. These books talked about trading psychology without any real reference to scientific study or research. Often, the discussions involved the author’s own personal experiences or those of a handful of traders; it was quite difficult for me to take personal experience as a standard reference base for dealing with such a vast and important topic as trading psychology. A major flaw in using personal experience as a substitute for sound research is the natural risk of a self-reference bias and therefore a lack of reliable and objective understanding.

For the most part, I found that trading psychology was dealt with from a mind-set perspective. The idea that these books were touting was that you need only change your thinking and that it was your perspective and how you viewed the market that would allow you to become a successful trader. If you would let go of certain ideas, affirm others, and do a cleansing of your mental household, then you would surely overcome your obstacles to consistent trading success. Some have gone as far as to address issues of social and cultural norms that may play a role in trading success. Perhaps if you eradicated old patterns and habits of thinking that did not serve the goal of successful trading, then you would be able to make it as a professional trader. Often, blanket prescriptions were given if a certain symptom or behavioral pattern were present. Although these methods and ideas have value and can be used in the process of becoming a better trader, there was still something that was not being addressed.

After reading these books and finding very little in the way of valuable information to provide any insight into why we as traders do what we do—or, more appropriately, do not do what we should do—I went back to my studies in behavioral finance and human psychology. I tried to see if there was something that had been overlooked. In addition, I have since drawn on my years of successful trading, of teaching students my methodology, and of evaluating and coaching trading practices, and I have confirmed that they are soundly integrated with research in behavioral finance and human psychology.

I have come to the conclusion that there are two primary factors that contribute to trading success: (1) a sound trading methodology or trading system and (2) psychology. I call these the pillars of successful trading. Although these might seem obvious at first glance, there really is a lot more to each aspect than meets the eye. Of course, a sound methodology or mechanical trading system is the backbone of trading; clear thinking, emotional stability, and intelligence are no match for a poorly designed system or a methodology based on flawed principles. The importance of a sound methodology cannot be overemphasized, but that alone is not enough. There are many methodologies and trading systems that are more than adequate for trading profitably in the markets, but statistically, 90 percent of traders lose money.

Typically, it is not the first pillar but the second pillar of successful trading that causes most would-be traders to fall short of their trading goals. It is here that I focused my attention. In particular, I researched an area of trading psychology that has hardly been addressed. If psychology is the root of our trading inconsistencies, then we must reveal the factors that play the greatest roles in our trading successes or failures. If who we are affects our trading success, then the goal must be to find out exactly who we are and what makes us tick. To answer this question, we need look no further than our own personality traits.

The Impact of Personality and Emotions on Performance

It is my research into personality traits and my experience teaching and coaching that led me to develop the Trading Personality Profile (TPP). The TPP is an invaluable tool that can be used to identify those personality traits that can be your strengths and those that can be your weaknesses when it comes to trading. What if, no matter how much you affirmed that tomorrow you would follow your system or you swore that today you would let your profits run, it would have absolutely no effect whatsoever? What if, even with the addition of several new indicators with uncanny accuracy for your system, you would still not realize your trading goals? What if your personality was in direct conflict with your chosen method of trading? If you have the personal characteristics suited to mechanical system trading and you are practicing discretionary trading, then you will undoubtedly experience loss and frustration; the opposite is just as true. Traders best suited to discretionary trading who are trading using a mechanical system will not consistently follow that system. It is not for lack of discipline or desire; their personalities are just not congruent with that type of trading. To follow a method or system that is in conflict with your personality is nearly impossible.

To solve a real problem, a real solution must be offered; speculative solutions are only temporary. Any approach, without an in-depth assessment of a trader’s personality traits, may produce a few motivational sparks, but it will not have any lasting influence with regard to modifying behavior. Individual personality is a cumulative effect of three major factors: innate and inherent tendencies, the culture and the environment, and personal experience. According to a vast body of research, approximately 50 percent of our personality is shaped by our dispositions and innate tendencies. Therefore, to be a successful trader, it is imperative that you have a working knowledge of your personality traits. With these in mind, a trading style, system, or methodology that is compatible with your TPP can then be chosen to produce a desirable performance.

The compatibility of one’s personality traits with the trading style and method chosen is the most important factor in the making of a successful trader or investor. Knowing your personality traits allows you to choose the particular investment vehicle or trading method best suited for you, thereby drawing on your strengths and reducing the impact of your weaknesses for better trading performance. For arranging your trading environment, choosing a trading system, overcoming habits that negatively affect your trading performance, and identifying behavior in direct conflict with your trading system and trading goals, the TPP is an invaluable tool for creating practical solutions for today’s obstacles to trading. Using the TPP, we are able to act from a place of self-knowledge and to then customize a trading plan suited to our needs.

Decision Making

In addition to personality traits, we must also look into how we as individuals process information. How do we make decisions? Here, I have taken an in-depth approach and identified what I call trading decision traps to which traders often fall prey. Our decision-making and analysis processes—or lack thereof—play critical roles in our trading. By avoiding certain pitfalls in our decision-making process, we will avoid pitfalls in our trading as well. When put into simple terms, trading methodologies and trading systems are nothing more than decision support systems; they help us to make decisions from a clear and concise reference point. As humans, we are 100 percent emotional beings. Although we would like to believe that we make rational, informed decisions, this is not the case. In fact, most of the time, we make emotional decisions and then try to create rational reasons for our actions.

As you can see, personality traits and decision-making processes are crucial to trading success. Without a working knowledge of your personality traits and the possible implications they will have on your trading, reaching your trading goals is more hit or miss than it is anything else.

You may say, I know there are successful traders out there who know nothing about this. This may be true, but those traders are successful because they have instinctively and intuitively found a method or system that fits with their personalities; they have also found ways to make their decision making efficient and effective. Through trial and error, they have been able to identify self-defeating behaviors and to form new habits that serve their trading goals. This is by no means an impossible task. However, if you have ever talked to these traders and asked them how much time and effort it has taken them to get to where they are today or how much money they have spent to reach their goals as successful traders, then I am sure you will agree that it was a long, arduous, and expensive journey. Figuring out your TPP is about shortening the journey to becoming a successful professional trader; it is about saving time and money; it is also about saving the most precious resource of all: your emotional capital.

Who Can Benefit from This Book?

Novices, professionals, traders, and money managers will all find the information in this book very practical and useful. Your TPP is the foundational reference point for all your trading decisions. After acquiring your TPP, you can then make confident, intelligent decisions about your trading with the knowledge that what you have chosen has the greatest chance for your personal success.

As a novice, you can save an enormous amount of time and money while learning to trade. As a professional, you will be able to pinpoint those areas that are sabotaging your performance. As a fund manager, you will have at your disposal a tool that will give you an objective way to qualify your prospective traders and to evaluate and effectively deal with your current staff.

Complementary and Developmental Strategies

Once you have determined your TPP, you will have in front of you the most powerful information that you can find for maximizing your trading performance. And keep in mind that this is only the beginning. Your TPP will be closely compared with that of an ideal TPP model for specific types of trading. The key word here is ideal: few, if any, traders are an exact match with such a model. It is at this point that developmental or complementary strategies come into play. How closely you match a particular style of trading will determine what types of strategies will be used to bring you closer to your ideal TPP model.

In general, developmental strategies are used for behavior modification and involve working with your beliefs and value system to affect change that will help you to realize your trading goals. Complementary strategies are typically used to handle personality traits that may directly conflict with your trading goals. Certain personality traits may keep you from performing trading tasks in an efficient or consistent manner; complementary strategies are used to minimize the influence of those traits and still allow you to realize your goals as a trader.

Why Another Psychology Book?

All too often, would-be traders fall by the wayside, losing their hard-earned money and doing irreparable damage to their psychology. I have written this book in the hopes that the gap between trading knowledge and trading performance for all aspiring traders will be bridged. It is my belief that this can be done only when a trader’s personality is honestly, openly, and objectively evaluated in the light of trading. Unfortunately, few, if any, look at this missing link in their quests to become professional traders. In my research and my direct experience trading, teaching, and training professional traders, the TPP is the most powerful, objective, and efficient tool that I have found to help traders reach their goals and to maximize their trading performance. With the help of the TPP, unique strategies can be put in motion to quickly target and neutralize negative beliefs and their resulting actions, and there is no reason why you should not be able to realize your goal of becoming a successful trader.

CHAPTER 2

THE TWO PILLARS OF SUCCESSFUL TRADING

T rading offers several opportunities for a savvy trader: freedom, intellectual challenges, and an exciting, lucrative career. But is it suitable for everyone? How do you know if trading is right for you? Or, rather, and even more importantly, are you right for trading? When choosing any path or career, there are fundamental questions that must be asked. Before pursuing a career in the fast-paced world of trading, potential traders need to ask themselves the following:

• Do I know how to trade?

• If I think I do know how to trade, then do I know how to do it effectively?

There are two key elements involved in successful trading. The first is technical knowledge, and this involves the mechanics of a specific methodology or system that is to be followed. The second involved element is the trader’s ability to carry out the method’s or system’s specific trade recommendations; this aspect of trading is rooted in the trader’s psychology. Although many traders have developed a viable trading system and know how to use it, the fact remains that most are unable to implement their own systems’ recommendations. It would be wise to know if you have the proper psychological profile for a particular style of trading before you invest your time and money in learning a trading methodology or purchasing a system. It does not matter how profitable a system might be; if you do not have the proper psychological profile to use it, then you will not be able to take full advantage of the system’s potential.

To reiterate, trading performance is based on two major factors: (1) the trading system or methodology and (2) the behavior of the trader in relation to the system—the trader’s psychology. The trading method or system encompasses trading knowledge, market research, proper back testing, statistical analysis, and sound money management. The trader’s behavior refers to all the emotional and cognitive factors that may influence trading decisions in relation to the trading system. Figure 2.1 depicts the two trading factors that