In their operations, both beginners and experienced traders often face psychological issues. Despite being rather subtle, this aspect of trading is extremely important. Market players try to improve their skills in technical and fundamental analyses, capital and risk management, but suffer losses nonetheless. Of course, post factum mistakes are clear. Most of them are the result of an early exit from the market, a late market entry, or a fear of opening a position in general.
A person makes decisions guided by not only logic but emotions as well. Sooner or later, traders come to a conclusion that they should work on improving both themselves and their psychology. The Internet is already full of advice on what habits one should build and how to discipline oneself but most of them offer to “break” yourself and change radically. As a rule, applying such advice in practice doesn’t result in any success. The reason for that is that a person has several natural dynamic behavior aspects, which build a temperament.
In this article, we’ll talk about temperament and how it can influence a trading style and susceptibility to risks and losses. If you see yourself in any of these descriptions, take it easy, and don’t try to change your attitude to trading right away. First of all, this material is intended for self-analysis and exploring your knowledge about yourself as both a person and a trader.
What is temperament?
Once I was involved in teaching beginner traders and watched them becoming who they wanted to be. It helped me to identify a certain pattern: the most emotional and energetic students tended towards scalping or day-trading, while quieter and calmer ones showed good results in mid-term deals. Tellingly, they did it unconsciously during their classes on demo accounts. I was intrigued by this, that’s why today we’ll talk about temperament. Let’s start with the definition.
Temperament is a set of individual aspects of human psychology, which defines a person’s “modus operandi” in any given situation. The keyword here is a “set”. If we want to define a personality type, we should take into account all responses and processes that form a disposition towards any given behavior model.
When it comes to trading, the most important processes are:
- Emotional excitement – implies strength and speed of emotions induced by external stimulus.
- Reaction speed – indicates how quick response is shown. It is often can be detected in the pace of speech.
- Responsivity – shows how a person responds to external environmental factors.
- Activity – implies a speed of interaction with the outside world.
- Rigidity/flexibility – demonstrates a person’s ability to adapt to external influence.
Types of temperament
It is quite common to speak about four temperament types: sanguine, melancholic, choleric, and phlegmatic. They are marked by the following features:
These people are low sensitive and have a high response rate. Their key features are impatience, hot blood, their mimic and gestures are expressive. Choleric individuals are very persistent in achieving goals and focus their attention pretty well. They immediately join any conversation and zestfully defend their point of view.
Such individuals keep the balance between activity and responsivityю They are easy to talk to and optimistic and do not experience “weltschmerz”. Sanguine personalities are hardworking, don’t become tired, and shift their focus easily. Their interests and hobbies can change very often.
People of this temperament type are often sentimental and very sensitive to external influence. They sometimes can be extremely thin-skinned and vulnerable. As a rule, melancholic individuals are shy with low attentiveness. They often give up arguing, their mimic is unexpressive. In some ways, they are the polar opposite of choleric individuals.
They are very active but not very responsive to external circumstances. These people are hard-working, good at focusing their attention, but it takes them some time to switch between tasks. Phlegmatic individuals are cold-blooded in emergency situations, while their mimic is similar to melancholic. The expression “frozen face” is about phlegmatic.
How does a trading style depend on a trader’s temperament?
It’s very important to understand that it’s extremely difficult to find a “clear” temperament type in real life. Quite often, a person has a prevailing type and a slight mixture of others. This is one of the reasons why you shouldn’t consider the descriptions below as guidelines for actionю first of all, this article is for self-analysis.
My observations say that choleric traders start trading on an M1 timeframe “ex improviso” without even being slightly prepared. For them, all timeframes longer than H4 are not worth paying attention to.
In the eyes of such traders, a financial market is a kind of gambling, although they often fail to realize that. They easily fall for false promises of win-win trading strategies. The key preference is scalping, while other strategies are not even considered.
In the early days, choleric traders do not consider losses as a reason for stopping and analyzing the situation. On the contrary, losses provide an extra incentive to continue pursuing easy solutions to get profit. More often than not, such pursuits lead to a loss of either interest in trading or a lot of money.
To achieve results, for these traders, it pays to focus on day-trading combines with swing trading. Short-term intraday deals will provide them with necessary adrenaline, while swing trading will help to compensate for losses incurred in ill-considered transactions. The strength of such traders is quick reaction and decision-making, while their weakness is impetuosity, which turns trading into another game of chance.
Just like choleric traders, they sometimes are be fascinated by scalping. On the other hand, unlike choleric traders, they are ready for changes and switch to intraday deals much quicker. Due to excessive emotional sensitivity, they may get carried away and spoil all they achieve their monthly results in a couple of days.
It’s difficult for them to maintain mid/long-term positions due to the lack of patience, although they are much more patient than choleric and melancholic traders. Such traders have no problems with swing trading, they often change trading instruments. Sanguine traders are acceptive to losses and failures but lack perseverance in self-improvement.
Scalping in their early trading days is not a thing for phlegmatic traders; it might be good for them after, let’s say, 5 years of active practice. False promises of fantastic profits may force them to waste time studying scalping strategies (luckily, they are very persistent) but their low response rate won’t let them make quick decisions necessary for this trading method.
Phlegmatic traders can find more success in swing trading and they can also make decent mid/long-term investors. As a rule, phlegmatic people are very good in this area.
Melancholic traders are recommended to avoid any active trading. A good option for them is to focus on long-term investments from 1 year. The key principle is to check the terminal as seldom as possible and spend more time on sharpening skills in macroeconomic analysis. Stresses are very harmful to melancholic traders and make them want to leave the market.
Such people are very sensitive to losses, can waste a lot of time in “drawdown”, and go up in smoke eventually. Therefore, their time on the market is rather short: after incurring a loss or losing their entire deposit, melancholic traders usually decide not to be engaged in trading activities.
Our psychological reactions to market events directly depend on our temperament type. Most people come in trading being adults when this part of their personality is impossible to change.
Consider a temperament type when choosing a trading strategy? Definitively yes. Define your future trading career using the temperament alone? No, for sure. Don’t forget that any strategies should be tested on a demo account first and only after that applied to real trading.
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