September 7, 2006

Personality and Trading Style: Finding the Right Match

It's natural to search for a sure thing. Although some people love taking risks, most of us would rather take $100 right now, instead of taking a risk and ending up with nothing. The extent to which you prefer risk depends on your personality, however. Some people seek out risk, and enjoy the rush. Other people seek out absolute certainty, safety, and security. They are uncomfortable with uncertainty and risk. There's no one right way to trade, though. You must make sure that your trading style matches your personality.

If you prefer certainty, you may also prefer long-term investing. When trading in the long term, making sure the trend is in your favor is more likely. You can make sure that the trend will be sustained before making a firm commitment. Short-term traders, in contrast, don't have the luxury of gathering a wealth of confirming evidence for a trade. In the short term, you have to take a little more risk. You have to live with a little bit of uncertainty. Again, there's no one right way to trade, but if you can't stand uncertainty and risk, you may have trouble making short term trades.

Why do short-term traders have to take more risk? It's a simple matter of supply and demand. When you buy a stock, you cannot make a profit unless there is someone ready to buy your position from you later. A long-term trader can wait it out. In a worst-case scenario, inflation will often take care of early paper losses. As long as the company stays in business, you can always sell a stock for more than you bought it for if you wait long enough. (It may take years, but it is likely to happen if the company produces a worthwhile product that people will always need, such as General Mills.) Since a price move is shorter for a short-term trade, it is often necessary to buy a stock before all indicators line up. You have to buy early and sell into strength when there are buyers left to buy your position. That may happen or it may not, but that's the chance you must take if you are a short-term trader. If you can handle uncertainty, then you may enjoy short term trading.

Some people thrive on risk. They prefer uncertainty. It's within their nature to take risks. What are you like? If you don't mind risk, and are comfortable with it, then short-term trading is for you. But again, there is no one right way to trade. Don't be afraid to look deeply at your personality. If you don't like risk, that's all right. Trade in the long term. Whatever you do, however, don't force yourself to trade in a style that doesn't suit your personality. Trading can be rewarding and profitable, but only if you respect your personality and find a good match between your trading style and tolerance for risk and uncertainty.


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