Welcome
Hello and welcome to our ninth article. This issue suggests how our simple equation for trading from last time may relate to trader personality types. All articles are saved at our Medium page and also on this site, which has a clickable version of the map of all articles: https://theiqt.com/blog.
These articles are based on my experience from consulting and product development at The IQT. Do let us know if there are topics you would like us to cover, questions you would like to resolve, or if there are insights you would like to share from your own experience.
Last Time
In Article 8 — “The Fundamental Equation of Trading”, we discussed a simple description of the rate of profit and some basic insights on how to maximise profits.
Overview
• As Ed Seykota, a famous commodities trader, said, “Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.”
• The DiSC personality model has 4 personality types: D (Dominant), i (Influencing), C (Conscientious) and S (Steady). The first 3 types align with 3 types of trader.
• D types are concerned with maximising profits and gaining high returns regardless of costs.
• I types like to be involved even if profit is not maximised, and tend to focus on maximising the number or frequency of trades
• C types dislike being wrong, so focus on a high number of winning trades (even if average returns are not high) and minimising costs
• S types are arguably not suited to trading. They may still be able to contribute via a support role e.g. programming.
Main Points
• Phillip Konchar, a highly experienced trader and CEO of TraderCast, used to give talks for traders at the Alpari offices in London. This issue is based on the insights he revealed about personality types. I have in turn applied the insights to our fundamental equation of trading:
• Phillip explained that the DiSC framework can be used to identify your personality type. While most people use the framework as a personal assessment tool to improve productivity, teamwork and communication and in the workplace, it can also help you to determine the type of trading strategy suitable for you. Trading, even algorithmic trading, is not devoid of personality in the sense that different traders have different preferences e.g. with regards to risk aversion or types of assets to be traded.
• The DiSC personality model has 4 personality types: D (Dominant), i (Influencing), C (Conscientious) and S (Steady). The first 3 types align with 3 types of trader. Here is a diagram from https://www.discprofiles.com/blog/2017/03/disc-personality-types/:
DiSC Personality Characteristics
• D types are concerned with maximising returns (R_i) regardless of costs. When their trades win, they like to win big and are willing to endure many small loss trades (so may accept relatively low probabilities p_i of high returns). They tend to favour strategies with positive skew, such as momentum strategies.
• C types dislike being wrong, so focus on a high number of winning trades (high number of outcomes with significant p_i_j of returns R_i_j) even if average returns are not high. They may also focus on minimising costs (C_i). They are likely to favour strategies with negative skew, such as reversion strategies, where the average loss-making trade may be relatively high compared to the average profit-making trade.
• I types like to be involved, even if profit is not maximised, and tend to focus on maximising the number (N) or frequency of trades (reducing Δt).
• S types are arguably not suited to trading. The DiSC website describes them as “soft-hearted”; as such they may not be willing to tolerate any losses or uncertainty in their equity curve. They may still be able to contribute to trading via a support role e.g. programming, research.
• Overall it is informative to understand your own trading personality as that will give you an idea of what types of strategies you have a natural affinity for, which will give you the confidence and comfort to maintain your trading. At the same time, each personality type can learn from the other types’ method of generating profit, e.g. D types may wish to find strategies with higher trading frequency, while I types may wish to focus more on higher return strategies.
Further Reading
We will explain some of the performance measures used in evaluating trading strategies, such as win / hit rate and drawdown.
Thanks and happy trading!
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