We come to the trading with two types of capital: one is monetary and the other is psychological. Trading puts both types of capital at risk, but your trader personality largely determines the outcome.
If you are a conservative trader, by which I mean that you don’t use leverage or margin, then you naturally protect and preserve capital. Today I spoke with a trader from New Zealand who is just this sort of fellow. He wanted to consult with me because according to one of my free trader assessments he scored as “compulsive, anxious and depressed” and he wanted to know if I had any advice for him. By the way, he agreed with the informal “diagnosis” and said he wife would also concur.
In a moment I will tell you more about this trader, but before I get to that…
…about 30 minutes later I found myself on another consultation call with second trader from New Zealand. (That’s never happened before.) He is a competitive athlete, body builder, martial artist and international entrepreneur. He’s brilliant, tenacious and has never failed at anything in his life.
He represents the opposite type from the first caller: he’s a risk taker and wants to put his capital to work. He’s been a professional trader and he was consulting because he has an opportunity to manage OPM and wants to sharpen his game.
Which trader do you think has been doing better lately, the depressed guy or the pro?
The compulsive, anxious and depressed fellow is a very profitable trader with an 80% win rate. He sells premium on weekly options and has a steadily rising equity curve with very minor drawdowns. He trades options on the popular stocks of the day such as Twitter and Facebook. And if he gets assigned, he sells covered calls. He trades small size so he can sleep at night, does not use margin and his risk adjusted return on capital is enviable. He has outperformed the S&P 500 this year by a factor of 10.
I did give him some advice: “Don’t change a thing about you or your trading. You have found the perfect niche for a person of your personality.” Indeed. He lets others get excited and even impulsive about the prospects of (TWIT) or (FB), but he stays basically calm because he trades small size and he gets paid upfront. A bird in the hand…
The martial artist called me because he had recently experienced a 9% drawdown that could have been avoided (that’s a lot for a pro.) He knows he’s often his own worst enemy and he needs to work on that. He is putting his monetary and psychological capital at risk when he shouldn’t, when he has no edge. And as a tenacious fighter, he stays in losing trades too long. He needs to learn to lose gracefully, or he risks losing it all.
