A trader’s psychology

In this section, you’ll complete a risk assessment questionnaire and learn about the three types of traders to determine which category you fall into. Based on your responses, you’ll gain insight into potential risks you may encounter while trading and how to address them.

Risk assessment questionnaire

Answer questions 1 to 10 by choosing the answer that’s most related to your current situation (or what you’re most likely to do in the situation provided). Ignore what you think you’ve learned after reading the question (what you should do) and focus on what you would do:

1. How would you be characterized by your best friend?
   1. Gambler
   2. Willing to take some risks
   3. Cautious
2. Choose your prize:
   1. $1,000 cash
   2. 50% chance of winning $5,000
   3. 10% chance of winning $15,000
3. The price declines by 50%. What’s the percentage it needs to increase to arrive at the same level as before?
   1. 50%
   2. 75%
   3. 100%
4. What win rate do you need to break even (getting $0 in profit) for trades with a risk-reward ratio of 4:1 (for every trade you risk $1 to win $4)?
   1. 20%
   2. 25%
   3. 33%
5. What does risk mean for you?
   1. Prejudice
   2. Thrill
   3. Possibility
6. What would you do with $1,000?
   1. Invest all of it in a fast-growing crypto asset
   2. Invest 25% of it in a fast-growing asset, 25% in a stable asset, 25% in a risky asset, and keep 25% for other opportunities
   3. Keep it in cash for better opportunities
7. If you had $10,000 to invest for 10 years, which option would you choose?
   1. Low risk, low return
   2. Medium risk, medium return
   3. High risk, high return
8. When the market goes down, what would you do?
   1. Do nothing
   2. Double down
   3. Sell riskier assets and buy safer ones
9. If you left $1,000 in a deposit with a 2% interest rate per year and inflation was 2% per year, after 1 year, how much would you be able to buy with the money in the account (without taxes)?
   1. More than today
   2. Less than today
   3. Exactly as much as today
10. When making a trade with a strategy that has an 80% win rate, if you’re at a minus of 10%, what would you do?
    1. Consider exiting the trade
    2. Double down—the strategy has a high win rate
    3. Set a stop-loss lower, just in case it falls even further

Here are the scores for the answers to these questions:

Figure 2.1 – Scoring table for the answers to the questionnaire

For question 8*, it’s logic versus psychology. Doing nothing is what a low-risk investor would do, even though financially speaking, selling riskier assets and buying safer ones is what a low-risk investor should do. In my test, I’m biased toward psychological accuracy.

The gambler (score < 17)

What is life without a touch of risk?

You are a gambler at your core, and you actually know it. When you trade, your emotions run high, and you’re there, into the trade, living every high of it and dreading every low. When you win, you win. You smile and you think of all the future earnings that you’ll receive. And when you lose, you sure lose. You’ve already doubled down, and every loss hurts.

In my coaching business, I have a lot of gamblers who come and want me to teach them how to win when trading. When they see the work it takes, they ask for the best strategy or daily signals. And when I show them what’s the work behind creating and managing such a strategy, they have a choice to make. Either slow down hard or risk losing money before actual learning occurs.

The best advice I have for the gambler is to better understand their counterpart, the cautious trader. I invite you to do swing trading that is not micromanaged, to set trades that enter at a certain price and that exit at specific prices, be it at a loss or a win. Before each trade, you need to have a hypothesis (reasons for entering the trade and for exiting the trade at your chosen levels). Then, after the trade has run its course, you need to revisit your hypothesis and update it with the result.

In time, this will help the gambler in you create a distance between your emotions and the trades you are taking so that you can follow a strategy to its success.

And to also have a release for those emotions, you can either use another account or just mark your trades as #spontaneous and do those trades with a lower amount of money.

The cautious trader (score > 23)

I want to protect my money before I win anything.

You value your hard-earned money, and you know you’re not here for the easy win. Maybe you’ve already started studying the classics of investment literature; if not, you’re surely planning to and you are ready to put that money into some fruitful investments. You are a bit scared of losing them, especially in the cryptocurrency world where you’ve heard that there are big fluctuations, but you’re here to stay and to ride those waves for the win.

I don’t have a lot of cautious traders as clients, but when I do, I identify them instantly. From the first few minutes, they are telling me what’s important to them (variations of not losing money), and they are also making sure my credentials are intact (How much did you win? What types of strategies do you use? What’s the success rate of your clients?). They are trying to make sure that they’ve made the correct choice.

My top advice for (fellow) cautious traders is to dedicate money to losses. Not to risk, but to lose. Trading is an emotional game, and when you switch from paper trading to money-based trading, a lot of emotions will circle around you, waiting for that chink in your armor. In paper trading, it’s easy to start a trade and then wait for it to finish. In real trading, you’re enticed to always watch the charts and to make sure that your trade is working... So, what happens if the price starts falling? Should you exit early or wait for it to touch the price you’ve set as a stop-loss?

Here, the cautious trader’s brain freezes. There are too many variables, and they can look at reasons for the trade to end in profit, but they can also find reasons that the trade will fail.

In order to overcome all of those emotions, they need to accept risk as part of their trading career and learn to manage it rationally and predictably.

The balanced trader (score between 18 and 23)

Winning is a slow and steady process.

You have lived a life full of experiences. You know that winning involves risk, and you’re ready to put some money where your desires are. Yet you have a financial reserve that you will not touch, and that is there just in case you realize trading is not for you. You’re willing to give it all but also to analyze your results after a time and to decide if this is for you or not.

I have quite a few balanced traders as clients, and they are the easiest to work with. That’s because I can put the psychologist in me to sleep and focus on the mechanics of trading with them. Some catch the mechanics pretty quickly, some a bit later, and most of them leave when they have a few techniques that they can trade and when they understand that trading is like chess—easy to learn, hard to master. Sometimes, they come back when they need a technique automated or when they have some really advanced questions.

My advice for the balanced trader is to continue what you are doing. If you’ve got this score, your emotions won’t impede your trading that much, and you will be able to grasp the concepts and learn at the pace needed to keep your motivation and start getting results. And after you’ve got the results, everything else is just scaling.

Some final thoughts on risk assessment

Every type of person can fit in the trading space, but some have more challenges than others. Maybe a cautious trader progresses slower, but they also lose less money. During this time, the gambler might get some early wins, enough to push their motivation to learn the difference between trading and gambling. But they might also get enough early losses to make them leave the markets for good. And in all this time, the balanced trader progresses slowly and steadily, still wondering how all those people win so much. Each personality has its own set of questions and emotions that help or impede them when trading and its own battles on the money battlefield. All you can do is prepare yourself to the best of your abilities and then live your life as you want to live it.

We’ve identified what type of trader you are, and next, I’m going to show you who the other market participants are and how they behave in specific market types.

But first, let’s start with an answer to the following question: What exactly are currencies?