“Be true to thy self” is a phrase often heard in almost all aspects of life, and the application of this age-old wisdom is even appropriate in the field of investing. Investing in any of our various markets requires discipline, knowledge, and experience, but the one key area that many investors unwittingly ignore is that the emotional component of having money on the line can undermine even the best decision-making processes for both beginners and experienced investors alike.
Addressing the psychological aspects of putting working capital at risk and making decisions under stressful conditions can be accomplished by following the advice of seasoned investors that actually invest as a profession. The initial step is to fully understand your individual personality type and then match it with one of the basic methods for reaping rewards in any investment genre. There are basically two types of investors.
On one pole, we have the studious personality that prefers to research his options, takes his time analyzing potential consequences, learns to spot bargains, and then invests for the long term – the “buy-and-hold” strategy. This person is patient by nature and deals with his portfolio like a “gardener”, carefully pruning and adjusting his “garden” over time to arrive at the desired balance of risk diversification and potential reward performance. His goals are long-term. Losses do occur and are dealt with, but research time invested upfront tends to reduce selection errors and produce more winners than losers. Fundamental analysis is the “tool” of choice in this arena.
On the opposite pole, we have the individual that desires a more active lifestyle and is not content with long-term horizons when it comes to investments either. Active management provides more stimuli for this person’s brain, and this personality type revels in a trading atmosphere where the pulse of the market is apparent and decisions are made quickly. An active trader does not care about long-term trends or the fundamental reasons marshaling market forces. His focus is on short-term opportunities provided by nuances in daily pricing behavior. Technical analysis dictates when and where he enters a market and when he should close a position. Losing trades are a major part of this action, but they are cut off early, and winners are allowed to run to offset any losses for a net gain over time.
These two personality types are at opposite poles, and the vast majority of investors are a blend of some of each behavioral type. How does one determine where they fall on this “personality” scale? One easy way to make this determination is to use the free “demo” systems provided by almost all forex brokers. These systems allow you to invest “virtual” cash, your working capital so to speak, using real-time quotes to simulate a realistic active trading environment. By experimentation, you will soon discover your anxiety level and tolerance for risk in a rapidly changing market and where your personal comfort zone resides.
Investing requires many skills, but aligning your style correctly with your individual personality profile will greatly enhance your results.
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