Dale’s problem, to hear him tell it, was inconsistency. Although he had a trading method that he had developed over the past year, he would have had to answer no to the last checklist question. He would repeatedly veer from his strategy, exiting positions before reaching his stop-loss and price target points. Other times, he failed to place trades that were practically begging to be taken. “My emotions are getting in the way,” Dale explained. “I’ve been wondering if I have the right personality for trading. Do you have a personality test I could take?”
I would say this is the most common question I receive from readers. Traders hear that personality (and, more broadly, psychology) is important to trading success, so they naturally wonder if they have the “right personality for trading.”
Hopefully by now you see the futility of that question. It’s like a medical student asking if she has the “right personality” to be a physician. Well, maybe she has the right personality for emergency medicine, but not for medical research; the right personality for anesthesiology, but not for family medicine. The issue is not one of possessing a global “right personality” for trading, medicine, sports, or any broad performance field. Rather, it is finding the right fit between your personality and the specific type of trading, doctoring, or athletics that you might undertake. Dale had the right personality to be a leader in the Army infantry, but perhaps he would have failed miserably on a Navy submarine or in the cockpit of a fighter jet.
What happens when someone well suited to one specialization has to perform in another, very different one? The result is inconsistency. A few years ago, a medical student who was well suited to psychiatry was referred to me during her acting internship (AI) in surgery. It turned out that her family dearly wanted her to become a surgeon, and, under pressure, she signed up for the AI. What happened? The student spent too much time talking with her surgery patients and their relatives. Indeed, she actually missed two scheduled surgeries because she was busy consoling worried family members. She empathized deeply with their plight—a wonderful quality for a psychiatrist, but one that is not so helpful for a surgeon. I imagine that I would want my surgeon to be steady and unemotional when I’m awaiting the knife in the operating room!
The student was referred to me specifically for her “inconsistent” performance during the AI. Her lack of attendance at the surgery, they felt, showed a problem with “professionalism” and “commitment.” They also felt it revealed a lack of respect for the surgery interns and residents who were trying to teach her. In fact, it signified none of those things. She was merely doing what came naturally and avoiding what didn’t.
That was Dale’s problem, as well. When I gathered the details of his inconsistent performance, I found that his chosen methodology involved spread trading. He had read about spreading and was drawn to the idea of limiting risk by buying something strong and simultaneously selling something weak. So, for instance, he might think that energy-related stocks would perform well in an inflationary environment and technology-related issues might lag. He might thus buy the energy sector exchange-traded fund (XLE) and sell the semiconductor sector (SMH). He liked the idea that he could make money even if the market plunged on unexpected news. As long as XLE outperformed SMH, he would profit.
A majority of his “lack of discipline” trades were ones in which he detected unusual strength or weakness on one side of his spread and pulled the other leg. For instance, he would see crude oil break to multiday highs and XLE catch a strong bid. If XLE’s strength was reflective of firmness in the broad market—and if SMH was holding its own or rising—he would bail out of his short position and leave himself with the outright position in energy. Sometimes this would work; often it wouldn’t. Once XLE was strong enough to make him want to lift the leg on the spread, its move—at least temporarily—was over.
My question for Dale was simple. “Suppose you were leading your men in the field on a reconnaissance mission. You saw a key enemy installation was nearby and lightly guarded. You wanted to engage, but didn’t want to give away your company’s position. When you tried to radio in to request engagement, you couldn’t get through to headquarters. How would you feel about your commanding officer if he was hedging his bet and refusing to answer your radio call, forcing you to make the decision regarding the engagement? If your mission succeeded, he could take credit; if it failed, he could claim that you proceeded without authorization.”
Dale, understandably, winced at my scenario. He made it clear that he would lose all respect for an officer who didn’t take responsibility for decisions. “A leader doesn’t hedge his bets,” Dale insisted. “He won’t have the confidence of his men, and he’s not fit to lead.”
It didn’t take Dale long to recognize his problem. By spreading, he was hedging his bets in the market. Deep down, he didn’t respect that as a trading style. Intellectually he knew that it’s a fine and potentially successful trading methodology, but emotionally he responded to it as if it were gutless. When he actually had an opportunity to “engage the enemy,” as in the XLE trade, he showed his true colors. He ditched his hedge and took responsibility for the attack. Like the medical student talking with the surgery patient’s family, he did what came naturally—and felt undisciplined as a result.
The last item of the questionnaire is a trick question because it is assessing a potential strength as well as weakness. Many traders who veer from their trading plans recognize at some level that those plans don’t fit them. Their losses of discipline are intuitive gravitations to their natural trading styles. The answer to their problems is not to blindly adhere to their methods and work on discipline, but rather to determine whether those methods are truly the ones to follow. The first step in climbing a ladder is making sure it’s leaning against the right structure. Too many traders are like Dale, furiously climbing misplaced ladders and then blaming themselves for getting nowhere.
When you have found your niche, you don’t need discipline to do the right things; you won’t want to do anything else.
At the risk of repetition, allow me to be clear about this: All things being equal, we will naturally gravitate toward those activities that we find fulfilling. We will avoid tasks that do not engage our talents and interests, and we will seek out experiences of success and mastery. If you are in your niche, you will consistently do the right things, because those come naturally to you. If you are not consistently doing the right thing, perhaps you have not found that point at the intersection of the circles that blends talents, opportunities, and interests. What we do when we’re inconsistent may just point the way toward our strengths by revealing what comes naturally.
Read More : What We Can Learn From Inconsistency
