You often find people discussing and debating what character traits make for a successful trader. It seems to be a very difficult to pin down what differentiates those who are hugely successful traders and those who are not. Part of the difficulty in making such a distinction seems to lie in the fact that the world of finance is filled with a eclectic array of characters. Those who have been very successful in the world of finance range from those who are hugely instinctive and those who are deeply academic and analytic. This is partly due to the wide range of trading strategies, with some traders basing their judgments on sentiment, others technical indicators, others underlying fundamentals and those who combine various techniques. It is also clear that the various activities traders and investors undertake differ significantly with the basis for entering a trade being hugely different. With the activity of a pit trader being unrecognizable to those who adopt a fundamental approach to trading and investing.
Some who adopt the efficient market hypothesis or versions of the random walk hypothesis, will reject the idea that there are particular characteristics that differentiate those who are successful traders from their less successful counterparts. This is due to the fact that any long term success is down purely to luck with some traders being lucky while others are not. At first glance this hypothesis seems to be intuitively false. But once you examine the number of players trading any given market the hypothesis becomes more plausible as you can see how it would be statistically possible for a given trader to hit a long winning streak due to pure luck alone.
Personally I don’t believe those who expose such theories. Though I do hold that it is likely that some traders do genuinely have long running streaks that can be attributed to nothing more than luck, it is clear to me that when you study the character and personalities traits of successful traders their seem to be several characteristics that are prevalent in the vast majority of these individuals. Today I’m going to outline what I believe these particular traits are.
1. Love of Knowledge
One thing that can witnessed in many top traders is their love of knowledge. Often those who have been extremely successful traders have a love of knowledge both for its instrumental and intrinsic value. The financial market places are a complex and ever fluctuating place, where relationships and correlations are breaking down and forming all the time. For anyone to remain successful in such a dynamic market place constant study and research is required. It would be foolish to belief that any strategy will really stand the test of time. A prime example of such a love of knowledge can be examined in the eminent hedge fund manager and investor George Soros who has been deeply influenced by the philosophy of Karl Popper in both his political and trading activities. Popper promotes the notion of falsification which means that we should attempt to falsify our hypothesis rather than verifying them and this idea has played an important role in Soros’s trading strategy and philosophy throughout the years.
2. Self Discipline
One of the most important characteristics I believe to be present in all those who are successful in the long term is a healthy dose of self discipline. Every aspect of trading takes discipline, even entering a position based on your trading strategy of philosophy takes discipline. Sometimes you will also have to recognize your mistakes and be able to exit a losing trade in order minimize the potential loss. Trading can effect the psychology of a trader in similar way to Gambling effects the gambler and avoiding falling into this trap takes serious discipline and will (Analogy between Gambling and Trading based on Skinner’s Psychology research into the effect of random payouts on the behavior of pigeons and humans). I would challenge anyone to find a trader who has a long history of success who also doesn’t exhibit self discipline at least within the realm of trading the financial markets.
3. A Degree of Risk Adversity
Protection of capital is one of the traders key concerns and also one the key problems facing traders. In order to make profits when you are correct you must have the capital at your disposal to take advantage of such situations. Any trader who doesn’t take a sensible approach to risk and is to Gun-ho in regard to risk won’t be around for a long time. It can be show that scenarios that are taken to be highly unlikely happen more often than commonly thought. While self discipline is important factor in risk management, it is important to note that certain individuals seem more prone to rash irrational risk taking and research in psychology seems back up such intuitive claims. People who are prone to taking such risks would probably be better off avoid engaging in trading. A sensible approach to risk is vital to every successful trading strategy and trader something that cannot be stressed enough.
