Of the five traits measured in the Big 5, neuroticism, has the best potential to impact your trading negatively. Those who score high on Neuroticism experience primarily one specific negative feeling such as anxiety, anger, or depression, but are likely to experience several of these emotions at the same time. Neurotics are emotionally reactive which can destroy the best trading plan/system regardless of the market environment. They respond emotionally to events that would not affect most people and their reactions tend to be more intense than what would be deemed normal or even acceptable by most.
Neurotics are more likely to interpret ordinary situations as threatening, and minor frustrations as hopelessly difficult. Their negative emotional reactions tend to persist for unusually long periods of time, which means they are often in a bad mood. These problems in emotional regulation can diminish the ability to think clearly, make decisions, and cope effectively with stress. In other words, it would be very difficult to find success in the markets.
Two of my favorite facets that are measured on the Neuroticism scale are anxiety and vulnerability. I can gain tremendous insight about a person just from this scale and focusing on these two facets. I know that they will have a difficult time being a discretionary trader and perhaps a market participant at any level.
- Anxiety: People who score high on anxiety often feel like something dangerous is about to happen. They may be afraid of specific situations or be just generally fearful. They feel tense, jittery, and nervous. Anxiety leads to a fear to step off the curb and trade so a “would of” or “should of” approach to the markets is taken. The end result is anger at oneself for not taking opportunities to profit when setups present themselves.
- Vulnerability: High scorers on Vulnerability experience panic, confusion, and helplessness when under pressure or stress. The market has a way of making us show our hand here, no question. Trading journals are a great way to learn what makes us vulnerable as common threads can be seen as entries are pored over during review periods. Fear presents itself as a secondary emotion and the thought of being susceptible to another losing trade, losing week, losing month impacts other facets of neuroticism eventually leading to inaction.
Many argue that they can separate their lives outside of trading from interfering with their market participation. I couldn’t disagree more. Neurotic tendencies can weigh heavily on your ability to be profitable in the markets as objectivity is clouded. Dr. Steenbarger has addressed neuroticism on his blog many times over the years. Later this week I’ll blog about some coping strategies that I’ve both used and prescribed over the last decade to deal with anxiety, anger and depression.