In his book, “Mechanical Trading Systems: Pairing Trader Psychology with Technical Evaluation,” writer Richard Weissman identifies three basic trader personality profiles.

Are you able to discover with one among the trading personalities below?

Let’s discuss the trend-followers, day traders, and mean reversion traders:

1. Trend-Following Trader

Weissman enumerates two traits needed for successful trend followers: patience and fortitude.

Trend-following mechanical systems get traders in strong directional moves, and signals typically form when the trend has already begun.

A typical entry strategy could also be to purchase at recent highs or sell at recent lows, in anticipation that the worth will make a recent high or low afterward.

This may increasingly seem counter-intuitive to the vast majority of traders who like to select “tops” and “bottoms,” but that’s what sets trend-followers other than the remainder.

The strength of this method is that in case you catch a robust trend, you may provide you with huge winning trades relative to your initial risk.

But after all, no system is foolproof and there are tradeoffs to grabbing potentially big wins.

Because the saying goes, “markets range 70-80% of the time.” Which means catching a robust trend may be rare, and sticking to a trend-following system requires that you just endure several small losses when your entry signals have you ever jumping in when the market consolidates or pulls back.

To be a trend-following trader you will need to be comfortable with potentially having a low win ratio, but so long as your winning trades generate enough profits to outpace your losses, then that’s all that matters.

So the questions you will have to ask yourself are, “Do I actually have the mental fortitude to handle more losses than wins? Do I actually have the patience to ride the winning trades to their full profit potential?”

If you happen to answered “yes” to those questions, or in case you feel stressed having to provide you with quite a few trade decisions in a day, then trend-following mechanical systems could also be the proper entry/exit method for you.

2. Mean Reversion Trader

Apart from trend-following systems, there are systems which can be based on the “mean reversion” theory.

When it comes to price motion, the idea states that on average, markets are more often trading inside a spread than a trend, and when the market goes beyond its average range of historical volatility, it tends to fall back to the center of that range, or the “mean.”

These systems aim to search for probable reversal points (i.e. tops and bottoms) where price movement could change direction.

The foremost difference is that while trend-following systems aim to “ride the trend” for giant profits, mean reversion systems normally have an exit in mind based on key support or resistance levels. This implies quite a lot of smaller winning trades.

A few indicators utilized in mean reversion systems are the ADX and Stochastic.

The ADX helps discover whether the market is in a trend or rangebound, while Stochastic indicates potential overbought and oversold conditions that are likely to precede a reversal.

The important thing to utilizing a mean reversion system, especially through the long-term timeframes, is maintaining rock-solid discipline.

Using this method could put you available in the market against a robust trend, which may be psychologically difficult if it doesn’t turn your way.

Also, there may be many distractions and obstacles that cause psychological stress for a trader, akin to the media and other traders.

You need to train yourself to follow your system’s rules irrespective of what and keep in mind that the strength of a mean reversion system is the high probability that markets will stay in a spread.

3. Day Trader

Lastly, now we have traders preferring quick scalping setups or day trades.

These may be trending or mean reversion systems but on a shorter-term time-frame. Weissman cites that these generate signals for trades that last 10 days or less.

Market junkies who’ve a knack for these sorts of fast-paced systems normally take a look at the hourly time-frame or lower to aim for smaller profits and place tight stop losses.

In line with Weissman, mechanical systems profit short-term traders probably the most because the frequency of creating trade decisions increases.

By utilizing a mechanical system that already outlines what entry and exit levels to take with pre-determined risk-reward ratios, a day trader is in some way relieved from stress.

Nonetheless, this just isn’t to say that intraday systems are all sugar, spice, and every little thing nice. The largest

The largest drawdown to using them is that they’re labor-intensive.

Traders need to be glued to their screens during trading hours either to be able to act on valid signals or to observe/adjust their trades.

Coping with potentially volatile intraday market motion, a trader must have the opportunity to quickly make sound decisions.

Mental agility is critical for somebody to master day trading systems and in case you think that you will have the capability to seek out Zen amid the chaos, you might wish to check out an intraday system.

What’s your trading personality?

You’ve gotten to keep in mind that no matter what type of system you’re using, the market will at all times discover a technique to put you between a rock and a tough place.

There will probably be times whenever you can have more losers than winners, trades go quickly against you, otherwise you’ll need to let go of a few of your unrealized profits.

But knowing what you might be comfortable with and finding the system or method that matches your personality will provide help to higher adapt to the always-changing market environment.

So in case you think that you just aren’t so good at calling shots under pressure, perhaps you might wish to keep away from short-term systems.

Alternatively, in case you think you will have the discipline to persist with your plan even when price motion goes against you, you might wish to check out a long-term mean reversion system.

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