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Trade Talk Blog: A Trader’s DNA


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Alex Preda King's College London
 

The following is a guest post authored by Alex Preda. He is professor of accounting, accountability and financial management at King’s College London, a TT CampusConnect™ partner school since 2013. His principal research activities relate to global financial markets, and his research interests include: strategic behavior in financial markets; decision-making and cognitive processes in electronic anonymous markets; market automation and trading technologies. His publications include, among others, Framing Finance: The Boundaries of Markets and Modern Capitalism (University of Chicago Press, 2009), Information, Knowledge, and Economic Life: An Introduction to the Sociology of Markets (Oxford University Press, 2009) and Noise. Living and Trading in Electronic Finance (University of Chicago Press 2016, forthcoming).

What makes a good trader? It’s an important question and one that preoccupies those in capital markets. I have the opportunity to interview a number of traders to see if I can determine what makes them tick and what kind of characteristics are essential for success. Here are some of the insights I gleaned.

I discovered that it is more than a trading strategy, available capital or a particular trading philosophy. For these to be effective, they need a firm foundation. I don’t know if I can say someone is born a trader, but I can say there are certain attributes to a trader’s personality that are significant for successful trading and constitute a good trader. If these questions seem more psychological than financial, it’s because they are. Needless to say, these questions preoccupy traders, both institutional and retail, as they try to improve their performance. In similar fashion, interview questions probe candidates to determine if they have what it takes to ensure the success of a trading desk.

Even when the markets were pit traded and physical prowess mattered, height, energy and a loud voice could take a trader just so far. These were trading tools available to some, but they were wasted if the individual lacked the essentials. Today’s tools are electronic and automated, but in the same spirit they are only as good as the individual using them. Even though traders today monitor computers and trading strategies are automated, firms still look for certain qualities that define a trader.

The traders I interviewed, without exception, said the psychological attributes matter. This is the backbone of any technical skill, trading strategy or information an individual may possess.

While my list is not exhaustive, these are the traits that were discussed the most:

Self-Awareness: Knowledge and awareness of your own personality or character. When a trader understands their strengths and weaknesses, they can capitalize on the former and minimize the latter. I had the opportunity to interview two traders who were husband and wife. Both were successful and both were very much aware of themselves. While he compartmentalized his life and dealt with trading separate from the rest, she approached life more holistically. Both were successful and their self-awareness contributed to their success.

Discipline: Trading involves developing a strategy, but it is not easy to follow one. Every trader can plan their trade, but trading one’s plan is what good traders strive to do. A good trader has the capacity to admit when they are wrong and act accordingly. Those who stubbornly resist what the market is communicating have brief careers.

Impassivity: Since a career in trading means repeating successful trading strategies, a good trader manages their emotions. A good trader is capable of keeping an even keel every day, which means not being carried away by profitable trades or being demoralized by losing trades. Cognitive psychology and behavioral finance have often emphasized overconfidence as a root of biased trading decisions.

Intuition: A good trader should be able to find those market inefficiencies others have missed. Having said this, no trade is foolproof, and the unforeseen is just around the corner. While grounded in experience, a good trader can and will act upon intuition. By incorporating experience, market activity and available information, a good trader will be able to derive insight that may not be apparent to others. Working hand-in-hand with discipline, the ability to be receptive and understand what the market may be communicating means having an open mind.

These qualities were underscored most by the traders I interviewed. They, as well as other traits, are interdependent and work in concert with each other. The fact that there is overlap accents how important it is to understand all of them. It emphasizes that the technical skills of a trader are built upon the psychological makeup of the trader. A successful trader possesses not only technical skills and knowledge, but also a certain mindset applicable to trading. You could say it’s in their DNA.