Successful Traders Possess Key Traits that Separate Them from the Herd
By Matt Blackman, CMT
Ever wondered if you have what it takes to be a really great trader? Your answer may be just around the corner.
Famous commodities trader Larry Williams and his son, Dr. Jason Williams, who studied psychiatry at the John Hopkins School of Medicine, have teamed up to document exactly what traits separate truly great traders from the rest of us. Due to be published in the fall of 2012 by McGraw Hill, the book specifically explores personality trait differences between extremely successful professionals and average traders. It identifies what personality characteristics are most important in determining our success or failure in this business. According to Dr. Williams, although there are many books that examine trader psychology, this is the first book of its kind to explore how personality traits work to either help or hinter trading success.
Stock trader Dan Zanger, the host of ChartPattern.com and author of The Zanger Report newsletter, was invited to participate as part of the highly successful group of traders studied. Zanger holds the stock trading record with an annual audited return of more than 29,000%. Every year Dan holds his annual ChartPattern.com seminar where traders learn first hand how he does it.
In the detailed 270-question NEO-PI-R personality test developed by two psychologists, traders are asked questions on a wide variety of topics. But the questions provided little insight or guidance about what the test was attempting to achieve, according to Zanger.
“The questions were somewhat contradictory. For example, one question asked if I liked bright colors and flashy items. I like bright colors but don’t like flashy items so how do you answer it? But it was certainly detailed and it will be interesting to see the results,” Zanger commented.
According to the Williams, the NEO-PI-R test is the most developed, validated personality test utilized by researchers and doctors. Questions may seem contradictory but they are carefully worded to probe specific traits in such a manner that make it virtually impossible intentionally influence the outcome.
We talked to Zanger about the test and characteristics he feels are essential to trading success. His answers provided valuable insights into how he trades and what helped him become and stay successful in this business.
Matt Blackman: “Do you think it’s worth the time and money for traders to take a psychological test to learn what their strengths and weaknesses are before they start trading?”
Dan Zanger: “It is essential that traders understand the strengths and weaknesses that they bring to the trading table if they want to make money. Since the Williams’ book focuses on trader psychology, it provides a lot of insight about what the test will tell you.
In my experience, there are traders who are determined, focused, dedicated and passionate and there are those who want to be successful but don’t want to do the homework, don’t want to or can’t focus and they just don’t have the mental tools or mental fortitude necessary. But even if you have the focus and determination, without the ability to see patterns, it’s impossible to do what I do. So there a many different factors essential to being successful.”
Figure 1 – A chart from The Zanger Report newsletter showing the powerful basing Cup & Handle pattern in the Holders Trust Oil Services ETF (OIH) in what turned out to be the foundation of a move that eventually took this stock north of $160. Chart courtesy of ChartPattern.com
MB: “One common theme Larry and Jason Williams found in their research was the fact that successful traders all shared a low level of anxiety under stress. Would you say this describes you?”
DZ: “You certainly get a sense of satisfaction from winning. There is a huge amount of winning gratification. Trading is a big game and you play the game to win. Other traders are trying to take your money every day. Knowing that you’re going to take their money instead is very gratifying.
MB: “Would you say that you experience a low level of anxiety under stress?”
DZ: “I’m always leery that my trade will turn into a loss. You always need to know how much you can lose in a trade. What is the risk on this stock? If a stock goes down $3 on a trade how will that affect me? If I can’t handle a $3 loss, then I’ve got too much stock.
Do I have a high degree of anxiety? I don’t believe in stocks, I don’t believe that they can make big comebacks. I’m so focused that when the trade is on, I’m not feeling anxiety. That only comes after the trading day is over.”
Figure 2 – A great example from The Zanger Report newsletter showing the power of a bull flag pattern amid a parabolic run-up in Garmin in 2007. Note the narrowing channel through which momentum slowly increased followed by an explosive break out and $20 run in just 2 months. But chasing a stock during a parabolic move is a bad idea. Chart courtesy of ChartPattern.com
MB: “What do you believe are some of the most important traits successful traders need to possess?”
DZ: “First and foremost, you need a tremendous amount of focus. Next, you need a passion for the business and then it’s essential that you are very visible and are able to quickly pick out chart patterns in whatever time period you are using.”
MB: “In summary, what would you say are the five most important factors to becoming a successful trader?”
Figure 3 – This chart shows the kind of sloppy sideways action that can decimate the account of the trader who tries to trade every move when markets are trendless. Chart courtesy of ChartPattern.com
DZ: “First, you need to do hours and hours of homework after market close on both winning and losing trades and to understand why you made them. You need to be fully aware both what you did right and when you made mistakes so will you do more of the former and less of the latter.
Second, as I mentioned above, a laser-beam focus on the trade during the trading day is absolutely essential. Distractions or mental lapses can be very expensive when you’re in a trade.
Third, I enter every trade with healthy dose of pessimism and exit either when the trade goes against me or when it doesn’t go as expected based on my reason for entering the trade in the first place.
Fourth, it is essential to keep you emotions in check so you trade logically based on what you’ve learned not how you are feeling that day. You need to understand that anytime an emotion takes over, you lose control no matter what that emotion may be, whether its fear, elation, greed or hope.
Last, the ability to recognize patterns in a heartbeat is essential. You need to understand daily short-term patterns and longer term patterns and be able to put them together. Volume is also an important tool because it provides insight into the level of trader participation.”
MB: “What is the single most common mistake traders including you make?”
DZ: “Continuing to trade a market that isn’t following through on setups i.e. a choppy market with whipsaws, false breakouts, with no leadership (see Figure 3). That kind of market chop can kill you. For a lot of traders including me, one of the toughest lessons to learn is when to stay on the sidelines when markets aren’t cooperating. It’s tough because you never know when the choppy market has ended and the next rally has started till after the fact. It is a natural tendency to jump the gun but getting in too early can be a very costly and potentially destructive habit. So another essential key to trading success is patience.”
MB: “What are some of the other common mistakes traders make?”
DZ: “I’ve seen a lot of traders buying out of the money options and thinking that is the way to quick riches when in fact you get eaten alive by time decay. To a large degree people are outright gamblers, who are just throwing cash at the market with no rhyme, reason or a deep understanding of the market. That approach is what kills so many so fast.
Among stock traders there is the strong need to buy really cheap stocks and that can be equally devastating. They don’t appreciate how the arithmetic is working against them. A one point drop in a $10 stock is a 10% loss versus the same drop in a $100 stock which is a more manageable 1% drop. Besides, cheap stocks are a lot more volatile which makes them riskier. But it’s tough to overcome that desire to buy something that’s cheap hoping that it’ll go to the moon and you’ll get rich. I learned that lesson a long time ago and the sooner you learn it, the more money you’ll make and keep.
Another common mistake traders make is the failure to use established rules. I have ten golden rules that I follow religiously in every trade.”
MB: “According to Larry and Jason Williams, one of the biggest surprises in their research was how consistent the personality traits between successful traders were. And the best traders were quite surprised to learn how their personality traits were working for them.”
DZ: “A big part of their success is an understanding that you don’t have to trade all the time, to wait for the right market and the right kind of setups to trade in the right kind of environment.”
MB: “What can traders do to improve their trading? Larry Williams believes that you can’t change your personality but you can adapt to it. Can traders eliminate destructive personality traits?”
DZ: “I would agree with him. You can’t change your personality but you can reprogram yourself with regards to your discipline. It is important to understand when things are working well. But it takes years to understand the charts, the behavior of stocks, learning to read volume, and realizing when stocks get too extended and to learn not to chase a stock.
Traders need to learn to program themselves on how stocks behave so that they know how to overcome their emotions and trade with logic and common sense in various situations. You may not be able to change your personality but your behavior to stock situations can be programmed. And once you’ve programmed your reaction to situations and then fail to react properly to those situations, you’ll realize you’ve had an emotional lapse. When you blow a trade you understand that your emotions have taken over. Then you work on not making that mistake again. Once you’ve programmed yourself this way, it takes constant attention and awareness to maintain logical control. One pivotal question every trader needs to ask him or herself before they enter this business is do I have the persistence, determination and discipline and am I prepared to dedicate the years it takes to develop these tools?”
MB: “In their research for the book, the Williams found that as well as having low levels of neuroticism especially anxiety, highly successful traders shared low levels of excitement seeking [gambler desire]. Would you say this describes you?”
DZ: “Some people, including me get anxious periodically because the stock is not behaving as expected so I’ll trade out. Sometimes I trade out early but I’m looking for fast movers so when they aren’t trading fast, I exit because that’s not what I’m looking for. It’s healthy to always have a deep mistrust of stocks. Traders who are eternal optimists get absolutely killed because they have a habit of staying in long after the trade has turned into a loser. If you can’t learn to control that desire to gamble and give in to that deadly compulsion to “roll the dice” in every trade, you won’t last very long.”
A big thanks to Larry Williams, Dr. Jason Williams and Dan Zanger for their time and input!
Matt Blackman, CMT is the host of TradeSystemGuru.com. Matt’s articles have appeared in publications such as Technical Analysis of Stocks & Commodities magazine, SFO (Stocks, Futures & Options) Magazine, Trader Monthly Working Money, Physicians Money Digest, Laffer Economics, The Wellington Letter, Traders.com Advantage, Traders Mag (Europe) and Active Trader. Matt is a member of the Market Technicians Association (MTA) and the Canadian Society of Technical Analysts (CSTA). He earned the Chartered Market Technician (CMT) designation and a B.Sc. (Honors) degree from Simon Fraser University.
Follow Matt’s latest trading ideas and market comments on Twitter at twitter.com/MattBlackmanCMT