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Do you have a Trader’s Brain?

Posted By Barry Ritholtz On January 28, 2007 @ 8:09 am In Investing,Markets,Psychology,Trading | Comments Disabled

With recent reports of the resurrection of day trading [1], we thought it timely to look at this 10-question quiz, created by Marketwatch’s Paul Farrell, asking "Do you have a trader’s brain?"

Give yourself 10 points for every one of the statements you agree with:

1.  I have lots of time to track the market and trade

Folks, this is a time-consuming job. Many hours daily. Do you really
have an hour or more to waste every day listening to cable hucksters?
To learn some esoteric market timing systems? Track market data? Engage
in active trading?

2.  I am very disciplined under pressure
"Market timing works and it works well
for people who actually practice it as a discipline," says money
manager Paul Merriman. "In theory, every investor is capable of
following the discipline of timing. But not everybody has the right
emotional makeup to do timing right. In real life, most people who try
are ultimately unsuccessful."

Inside, gamblers feel like losers, addicted to losing.

3.  Markets are volatile, but I can handle uncertainty
traders have the iron discipline to stick with their technical timing
system no matter how volatile and how unpredictable the external world

4.  Breaking news doesn’t distract me

As Jack Schwager put it is
his classic, "New Market Wizards:" "By the time a story is making the
cover of the national periodicals, the trend is probably near the end."
Bottom line: You’re always getting the story too late.

5.  Yes, it’s OK if I lose money

Most investors hate to lose, and behavioral-finance research tells us
this fear is so strong due to our own fragile egos. 

Traders see a different world; for
them it’s OK to occasionally lose money. The world’s unpredictable, the trading
game’s risky, you win some, lose some. But long experience and
discipline gives them an edge: They know they’ll win more than they

6.  I can even handle losing streaks
Can your ego handle a
sustained losing streak? Even if you are flawless and make no mistakes, conditions can and will change and you will hit a bad streak. No
trading system is perfect; They deal with risks and probabilities.

7.  I never buy high nor sell low
A Morningstar study tells us emotions not reason control
us: We invariably buy at the top, sell out at the bottom. Greed
triggers a buying frenzy near the top of a bull run, late in the cycle.
Then fear triggers panic selling at the bottom.

8.  I can make quick decisions, with no regrets

Successful trading demands quick, confident decision-making. Most people have difficulty making decisions, especially
with real cash on the line. Mistakes, regrets, negative
results will haunt you, causing fatal second gussing.

9.  No, I’m not overly optimistic nor in denial   
Behavioral-finance studies indicate that 88% of investors have an
"optimism bias." Overconfidence leads to bad investment decisions and losses.

10.  I can live comfortably on $50,000 a year
For the vast majority of Traders, its not a big money-maker. Full-time day-traders rarely
make more than $100,000 a year, averaging under $50,000.
Add up you score, if you have less than
80 points, Farrell’s advice is: Forget market timing and never become a

Behavioral-finance experts at the University of California
Davis studied 66,400 investors. The most-active traders averaged 11.4%
versus 18.5% for the passive investors.

Good stuff — thanks Paul!


Déjà vu! ’90s day-trading mania is back! [2]
Ten-question test: Do you have a trader’s brain for next bear market?
Paul B. Farrell
MarketWatch, 6:48 PM ET Jan 22, 2007

Back on the trading scene [1]
Walter Hamilton
L.A. Times, January 16, 2007

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2007/01/do-you-have-a-traders-brain/

URLs in this post:

[1] resurrection of day trading: http://www.latimes.com/business/la-fi-daytrade16jan16,1,4549798,full.story?coll=la-headlines-business

[2] Déjà vu! ’90s day-trading mania is back!: http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B9BF2A30B-BC88-463A-8FA7-D5849AD622B0%7D&siteid=mktw&dist=nwhpf&print=true&dist=printTop

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