1/1/2014 Understanding. Yourself. By Ivan Kuek, Senior Analyst. NUS Students Investment Society NATIONAL UNIVERSITY OF SINGAPORE

Size: px

Start display at page:

Download "1/1/2014 Understanding. Yourself. By Ivan Kuek, Senior Analyst. NUS Students Investment Society NATIONAL UNIVERSITY OF SINGAPORE"

Camilla Walters
5 years ago
Views:

1 1/1/2014 Understanding Yourself By Ivan Kuek, Senior Analyst NUS Students Investment Society NATIONAL UNIVERSITY OF SINGAPORE

2 Knowing Thyself Venturing out into the foray of FX Trading will always see an investor searching for the holy grail of all the technical Indicators or the legendary trading strategies of a famous trader. Understandably, many believe that if we were to follow a set of rules that have been proven to be successful over time, all new traders have to do to be successful is to copy this set of rules. Undoubtedly, it would be safe to say that certain rules in a trading plan are largely universal. For instance, the discipline of cutting your losses and letting your profits run. That said, in my opinion, other trading rules and factors such as timeframe, technical indicators used and other seemingly arbitrary factors are probably better if customized to the individual. In this sense, it is pertinent that any trader firstly understands oneself before he or she deems what tools or factors are best suited for his trading toolkit. Hence, this article will explore ways in which a trader can understand himself, before moving on to picking the right tools in building a trading plan. Lastly, this article hopes to explore how after understand oneself, we are better poised to understand the behavioral pitfalls that might affect us. Tools to Understand Self (MBTI TM ) One respectable tool in which an individual can use to understand his or herself is the Myers-Briggs Type Indicator (MBTI) TM which was developed by Isabel Myers based on Carl Jung s theory of personality types. This instrument uses four different pairs of attributes to describe an individual s personality. With the four different pairs of behavioral attributes, 16 different personality types can be formed. A brief summary on their attributes are listed below along with their differences between in pair. Extraversion Introversion Sensing Intuition Thinking Feeling Judgment Perception Energy directed outwards toward people and things Work others with Energy directed inwards towards concepts and ideas Prefer to work alone Rely on experience and actual data using 5 senses Focus on details ( small picture ) Rely on inspiration and possibilities Sixth sense Focus on the big picture Decisions based on logic Brief and businesslike Decisions based on human values & needs Prefer certainty and closure Personable Focus on completing task Spontaneous, Flexible Focus on starting tasks *If you have not taken the official MBTI TM test, you can take a free version for free in the link below. 1

3 So how does possessing a knowledge of the four different personality dimensions and our MBTI TM personality type? With a personality profile, and hence, some knowledge of our personality, we are able to understand our strengths and weaknesses with respect to trading. The Extraversion vs Introversion dimension describes how an individual gains interpersonal strength and mental energy, with extraverted individuals focusing preferring to deal with others and an introverted individual preferring to deal with himself. This dimension has the least impact on trading success with the exception of those who still trade in the pit. In this sense, being an extravert or introvert The Sensing vs Intuition dimension describes how an individual absorbs information in the world he lives in. The sensing attribute entails an individual who focuses on the present and on details using his five senses. On the other hand, an intuitive trader is one who has the big picture view of the markets and the trend in mind. Hence, an intuitive attribute might be more favorable for traders as it allows them to have a macro outlook of the current markets, stepping out of the present and understanding both past and future, enabling better trading decisions. The Thinking vs Feeling dimension describes how much consideration an individual gives to emotions versus logic when making decisions. Interestingly, although research by Dr Van K. Tharp show that being very strong in the feeling quotient causes a trader to obviously to veer out of control and make loss after loss as emotions gain the upper hand, it also shows that the best traders depict a balance between thinking and feeling. As such, traders who feel the pinch of losing but instead are motivated (not overwhelmed by them) to find ways logically to improve their personal methodology will probably be the most successful. The Judging vs Perceiving dimension describes an individual s attitudes towards ambiguity and degree to which an individual requires closure in making decisions. A judger is one who feels a sense of urgency to meet deadlines and would ensure decisions are made with after through research. On the other hand, perceivers are individuals who are likely to change their mind often before making a decision. Obviously, being too strong in the perceiving quotient is not favorable trait of a trader, as trading requires an individual to make informed decisions fast and after much preparation. Establishing an Appropriate Trading Plan How then do we apply all this knowledge in to establishing a trading plan? The few common parts of a trading plan are listed below. 1. Timeframe The timeframe we choose during trading very much depends on our personality. If a trader has a very strong Judging (J) attribute, he or she would most likely prefer short-term timeframes as the need for closure would be very great. In this sense, keeping trades open over long periods of time would frustrate the trader and cause much tension, possibly leading to mistakes made such as closing out profits early so as to alleviate this tension. 2

4 Next, if a trader possesses a strong Intuitive (I) attribute, a longer timeframe would most likely be more natural choice to take. Shorter timeframes only show price action in the short term and would not provide a long term trend or big picture view of price that a trader strong in the Intuitive (I) quotient would seek. On the other hand, possibly, a trader strong in the Sensing (S) attribute would prefer shorter timeframes as it provides more detail with regards to the price action. 2. Position Size With regards to the position size a trader chooses to take, the Feeling (F ) and Perceiving (P) attributes are particularly important to take note of. If a trader possesses both a strong Feeling (F) attribute and Perceiving (P) attribute, he or she must be wary of taking large position sizes. Why? Obviously, with an emotional personality coupled together with a fickle mind, taking up large positions would be a recipe for disaster. A large position in the markets generating much emotion in a trader who does not want to close his or her positions would most likely bust his or her account in no time. 3. Indicators There is a whole spectrum of technical indicators that a trader can choose from. Depending on personality, a trader might choose numerous indicators to just a few. Similarly, there are indicators that more complicated in nature as compared to ones which are relatively simpler. A trader strong in the Sensing (S) and Thinking (T) attribute would likely prefer more indicators so as to obtain more detail with regards to the price action, trend and so on. 4. Products The type of products traded also can be suited to a trader s personality. For instance, as compared to equities, orders placed on the spot foreign exchange market are more likely to have a smaller spread, incur less transaction costs, and be more liquid. Obviously, this characteristic of the Forex market would suit traders who have a stronger Judging (J) attribute as a short-term trades or frequent trading would not hurt their bottom lines as much as trading equities. Secondly, different products have their own peculiarities. For instance, the price action of Silver CFDs (XAGUSD) would be much more volatile or spikier when compared to a currency pair such as EURUSD. In this sense, traders who are more emotional and fickle -strong Feeling (F) and Perceiving (P) attributes should stay away from such products. In summary, traders should understand the unique qualities of the products they are trading before jumping into the markets. 3

5 Behavioral Pitfalls Herding Generally, groups tend to make better decisions as compared to individuals making decisions alone. However, there are times where the herd might make totally incorrect and irrational behaviors. Examples of such behaviors are the seventeenth-century tulip bulbs craze to the twenty-first-century internet stock bubble. The common saying that only a few make profits in the markets while the majority loses is probably appropriate here. Periods of irrational exuberance where individuals senselessly follow the rumors in the markets without understanding the nature of the price move is dangerous habit. In my opinion, trading is an endeavor which is very much more personal rather than a social one. It is extremely important to listen to information out in the markets but be sure to make decisions which are carefully thought out and not ones that result from the desire not to lose out to others and to follow the herd. Possibly, if a trader has a strong Feeling (F) attribute, it would be good to be alert to decisions made to satisfy the need to belong and to fit in with the herd, so as to prevent such unnecessary losses. Pride and Regret (Emotions) Every trader would inevitably experience emotions of pride and regret in their trading career. Often costly mistakes are made when emotions overcome a trader and blur his rational response. Hence, if a trader has a strong Feeling (F) attribute, it would be wise to take note that he or she would most probably be more prone to having emotions interfere will sound rational trading decisions. That being said, emotions affect all traders and it would be favorable to check one s emotions when making a trading decision. Conclusion In conclusion, this article shows the importance of understanding oneself before trading. In particular, I briefly covered the MBTI instrument and its uses in understanding personality with relation to trading. Of course many other ways of understanding oneself such as journaling and self-reflection are good ways in which to understand self and should be utilized. Hence, if we would to combine an understanding of the markets together with an understanding of ourselves, we would probably make better trading decisions and achieve better results. All in all, remember trading is a journey! Always seek to improve yourself in terms of knowledge, experience and as this article emphasizes, personally. We will never totally understand the markets or be completely sure of our trading decisions but we should always strive towards that ideal of perfection and always trade as much as you can afford to lose! In this sense, I will end with a quote from Paul Tudor Jones, Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt. 4

6 research@nusinvest.com if you have any questions! We will do our best to answer your queries! This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. This report is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice NUS Invest 5

FOREX Risk & Money Management. By Low Jie Ji, Research Analyst 1/12/2013. NUS Students Investment Society NATIONAL UNIVERSITY OF SINGAPORE

FOREX Risk & Money Management. By Low Jie Ji, Research Analyst 1/12/2013. NUS Students Investment Society NATIONAL UNIVERSITY OF SINGAPORE FOREX Risk & 1/12/2013 Money Management By Low Jie Ji, Research Analyst NUS Students Investment Society NATIONAL UNIVERSITY OF SINGAPORE Money Management Many traders like to focus on the profit aspect