The average trader has a pretty messed up notion about what a trading strategy is. A trading strategy is not something you pick up in a trading forum or on twitter, but it is a set of tested rules and principles which have to make sense to you and which have to match your trader personality. Randomly choosing a trading strategy that you read about somewhere and blindly applying it to your charts is one if the main reasons why 99% of all traders fail. In the following article we show you how a trader’s personality directly impacts choosing the parameters of a trading strategy and what to be aware of when it comes to your strategy.
If you have ever wondered why one trader can make a lot of money with a trading strategy, while another one keeps losing consistently with the same strategy, this article is for you.
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Determine Your Trader Personality
The first step to finding the correct trading strategy is determining your own personality type. You can break down the trader personalities into three main types:
1. The Aggressive Bully
A chest-pounding alpha-male that always has the last word in trading discussions and on social media. He is easy to spot because he loves to talk about his big positions, his big winners, but also likes to impress with huge losses he took like a real man. On social media he continuously shares pictures of beachfront villas, fast sports cars and expensive nights out in the most exclusive restaurants and hip nightclubs. He is the get rich or die trying kind of trader.
2.The Greedy Scrooge
The Scrooge loves to talk about risk and money management. He is a lover of statistics and playing it safe. When talking to a greedy trader, he will often talk about trades where he locked in profits already with a stop loss above break even or where he took partial profits. You will only very rarely hear a Scrooge talk about big winners or all the money he had made. Control, risk, slow but steady gains and always the finger on the mouse are the traits that mark a greedy trader.
3. The Anxious Wimp
The anxious trader frequently talks about setups and potential trades he sees on his charts. He constantly shares screenshots of trades that are ‘almost ready to take’, but where he is waiting for a little more confirmation. It is very easy to spot an anxious trader because usually he will not enter the trades that he talked about because they ‘didn’t feel right’, or he will enter a trade late because he ‘was not sure’. Another trait of the over-anxious trader is the constant questioning and reaching out for other people’s opinions.
Of course, in trading it is seldom just black-and-white thinking and, therefore, you will also be able to see hybrid types, such as the aggressive scrooge or the greedy wimp among others. Together with the previous descriptions, ask yourself the following 4 questions to get an impression of your trader type. If you are not sure where you fit in, after reading the full article you will exactly know how you should set up your trading strategy based on your personality type.
1.You often miss entries even though you see them evolving right in front of you. – Signs that you are an anxious trader.
2.You enter too early without waiting for confirmation of your trading rules. – You are definitely a greedy and/or aggressive trader.
3. You regularly execute your take profit order too late and see price reversing, giving back profits. – Your greed impulses cannot get enough.
4. You close trades too early before your take profit to secure profits. – This is a sure sign that you are a wimpy Scrooge.
Fine-Tune Your Strategy Parameters Based On Your Personality Type
The majority of traders does not come this far. After losing money with a trading strategy, they give up because they believe that the strategy does not work, or randomly change indicator settings to find explanations for a losing trade. The determined trader with a professional mindset accepts the fact that a trading strategy cannot be a moneymaker right from the start and that there are a variety of complex factors to understand. Furthermore, the parameters of a trading strategy have to be altered in a way that matches a trader’s own mindset and personality type. In the following we highlight four important trading strategy parameters and how your personality type interacts with them.
Trade-Frequency and the choice of timeframes
How often you find a trade depends on the timeframe you follow. Whereas following the 4 hour or daily timeframe may provide one signal ever one or two weeks, the 1 hour or 30 minute timeframes could generate a new entry signal every few hours or once per day.
A very greedy or aggressive trader might have problems if he can only find one trade every week or two and be tempted to violate trading rules to generate more trades. Due to his personality, an anxious trader will miss setups frequently and trading high timeframes would mean that he will have long periods of not trading and a lot of time for beating himself up because he has missed another trade.
On the other hand, trading lower timeframes can easily result in over-trading for the aggressive or greedy trader. For the anxious trader, lower timeframes might be a good fit because he will frequently see new potential setups and missing a single trade does not have big impacts as on the higher timeframes. As you can see, just the question of trade frequency and the choice of the timeframe is not easy to answer. The myth that trading the daily timeframe is easier for everyone should be abandoned immediately.
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The holding time and the investment horizon bring problems of trade management. Greedy and aggressive traders tend to widen taken profit orders because they believe that a trade has a big potential of making money. The result is that such traders will often see price reversing and giving back profits, although their trades have been already beyond their initial take profit order. The anxious trader constantly fears a reversal and will close trades ahead of the take profit target, cut winners and thus lower the expectancy of his trading strategy.
In general, the longer the holding time, the more chance for a trader to ‘mess around’ with a trade. It is therefore important to be aware of how you manage trades and find the optimal holding time for your trader personality.
Winrate vs risk:reward
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Some traders lack the statistical understanding of how expectancy and probabilities work in trading. For many traders it is therefore hard to trade with a trading strategy that has a relatively low winrate, whereas for some traders it is psychologically difficult to have a trading strategy with a high winrate and a low risk:reward ratio.
To be clear, a low winrate does not indicate a losing trading strategy, just as a high winrate does not automatically mean that a trading method will make you money. A profitable trading strategy with a high winrate can, and usually will, have a lower risk:reward ratio, whereas a profitable trading strategy with a low winrate will normally have a higher risk:reward ratio.
For a trader this means that he has to find the optimal combination of risk:reward ratio and winrate for his personality. Can you deal with long losing streaks and accept that you only need one profitable trade to make up for several losers without losing your head? Can you accept a low ratio between the size of winning and losing trades which usually comes with a trading strategy that has a higher winrate? Those are just a few questions you have to answer for yourself.
Your risk level per trade
You often read the magic number of risking 1% or 2% on any individual trade as the easy-fix for all your money management problems. But there is more to this than just choosing an arbitrary number you apply to every single trade.
First of all, your personality type will determine how you can handle a certain amount of risk per trade. The anxious trader will usually choose a risk amount that is too small, whereas the greedy and aggressive trader take far too big risk per single trade. The psychological problems that trades that are too small or too big bring are summarized here.
But it does not end here. The winrate and risk:reward combination you choose have to match your risk per trade level AND your personality type as well. As we have described earlier, a trading strategy with a high winrate will usually have a lower risk:reward ratio. Therefore, a low risk level per trade means that it could take a fairly long time to grow a trading account because winning and losing trades have a similar size. This will often result in breaking rules to find more trades which is especially true for the greedy and aggressive trader. In contrast, choosing a lower level of risk is usually the better approach for a trading strategy with a low winrate and high risk:reward. A low winrate means that your losing streaks are longer and, therefore, your drawdowns will be bigger. If you combine this with a higher level of risk, your drawdowns can eat up a significant amount of your trading account which will lead to further psychological problems.
When it comes to finding your optimal level of risk, ask yourself how you can handle large drawdowns and if you can accept a slower, but steady account growth. If your trader personality gets uncomfortable after a few losing trades in a row, a trading strategy with a low winrate and a high risk per trade is not going to be the best fit for you.
Conclusion: Finding Your Perfect Trading Strategy Is A Never Ending Process
Finding a trading strategy is more than just following traders in forums or social media who claim to make a killing. A trading strategy that works has to be tailor-made to your own trader personality and character traits. Losing money in trading is therefore not exclusively the fault of the trading strategy itself, but a mismatch between the trader and the trading method. To find the optimal fit for yourself, follow these points:
Determine your trader personality
Consciously define trade parameters that could match your personality
Evaluate the performance of each individual parameter and how you deal with them
Make adjustments if you experience problems
Repeat step 3 and 4 until you find your perfect fit