Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

PSYCHOLOGY OF TRADING SYSTEM DIVERSIFICATION

Years of empirical observation have led me to firmly believe that there are at least three distinct trading personalities: trend-following, mean reversion, and short-term (e.g., swing trading, day trading) trading. Yet nothing prevents us from expanding beyond our natural center of gravity (see Chapter 6 to determine the innate trading personality) and adopting the trading strategies of the other basic personality types. Although I feel adoption of intermediate-term mean reversion trading systems is easier for either the trend-trading or short-term trading personalities, I believe that, with practice, a person can adapt and master any of these personalities (although each person's natural center of gravity probably will continue to feel the most comfortable).

I believe that traders should incorporate a different trading style only after they achieve long-standing success with their natural center of gravity. We must master the type of trading system that addresses our psychological strengths (e.g., quick mindedness, patience, contrarianism, etc.) to build confidence and strengthen discipline. We nurture the good trading habits necessary for success in the easiest environment possible, and then, and only then, do we apply the universal rules of discipline and money management to the type of trading that seems foreign.

Although at first glance it seems simple enough merely to add another style of trading to our arsenal, with the exception ...