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Are left brain people better traders than right brain ones?

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John Forman - The Essentials of Trading author

This question was actually left as a comment to my What type of trading resources would help me read charts? post from yesterday. 

Dear John,

Thank you for the fantastic site and all the time and effort you put into helping others.

My question is also aimed at gaining success, not about books but rather about myself. There must be some psychological side or mental abilities that make some better than others at trading. Perhaps I’m being naive but by common sense I would guess that someone which is good with numbers would do better than someone who is awful at math. What you support this notion? What about “geeks”, people who can spend vast amount of time going over information, and in general are attracted to sciences; would you say they would make better traders than someone who likes to spend their time with people and play music?

Regards,
Daniele

This is a really interesting question. It’s one I don’t think anyone’s asked me before - at least not in this fashion. I’m glad for the opportunity to address the subject, and hopefully some others will take up the question as well, either on the own blogs or by commenting on this post.

Firstly, I think there are a lot of quantitatively oriented people out there (call them geeks or whatever) who would bristle at the idea they don’t like spending time with people.

As for whether the left brain quant types or the right brained “social” types are better suited for trading, I don’t claim any psychological expertise or training, but I’ll tell you what my feeling is on the subject.

Yes, you need to be able to do some basic arithmetic to figure out profits and losses, position size, and stuff like that. That isn’t terribly challenging math, though, and not really the intent of the question.

I think this question comes in large part from the fact that most of trading is numbers. Prices. Volume. Returns. They’re all numbers. But that doesn’t mean only the math-literate can understand it. Quite the contrary.

One point I would make here is that price movements are very much products of a social environment. That means they are not inherently quantitative in nature. Yes. There are definitely instruments and relationships between instruments which are highly mathematical in nature. Options and other derivative instruments can be very complex. Price movements in the main, though, are the result of human decision making processes - many of which are emotionally driven, or at least influenced.

Understanding the drivers of price movement aside, pattern recognition is a major element of trading (see Brett Steenbarger’s post Implicit Learning and the Unattached Mind). When we trade we are basically looking to identify patterns in price movement which tend to repeat. Now granted this can be done in a complex fashion using quantitative methods. But it can also be done in a mainly visual fashion by looking at the charts and seeing the patterns which develop on them. It definitely doesn’t take a math geek to see a trend in place.

There are certainly some skills needed for successful trading. I would not put them in the category of requiring a degree in math, physics, or statistics, though. The discipline to do the things your trading plan requires is one. The intention and drive to continue improving is another. I could list more, but there really isn’t much point. None of them require geekdom.

So for me the bottom line is that right brain types should not believe they are less able to succeed in the markets than left brain types. It’s all about finding the right niche and applying your own strengths and abilities to their optimal benefit.

Latest Guest Post

The Great Manic Depressive: The Markets

This post was contributed by Billy Williams

The markets are a lot like a manic depressive in that there are moments of incredible euphoria and then, almost in the blink of an eye, incredible feelings of despair and hopelessness. These emotional extremes are also contagious to those who are participating in the markets and as individuals suffer these extremes they eventually reach a point where they are paralyzed into inaction just as the markets begin to turn in their favor or detriment.

When the markets are healthy and the future for the economy looks bright the market is incredibly euphoric and like a manic depressive experiences incredible highs in emotional well-being that often result in caution being thrown away while riding the incredible sense of euphoria as the markets rise ever higher. Unfortunately, as night follows day, markets will eventually go down but the investors swept up in such a strong emotion as euphoria feel too connected to its source (the market rising) to ever consider that it may be time to lock in gains or protect a position. They are blind, like addicts that cannot admit their addictions they cannot admit that now is the time to leave the market for that has become there drug of choice.

After awhile, however, as the emotional high subsides in the market and suddenly it crashes as it discounts the future of the economy which faces a slow down or recession which causes an ever increasing sense of despair and hopelessness among the investors as they hold on during every decline and hope thru every short term rally only to feel there emotional well-being crash lower as the decline continues. The markets become more and more depressed to the point of no return for the investing faithful who have been bleeding losses since the crash and, in there final act of their investing death thro, they liquidate their holdings for a fraction of what those holdings were once worth.

The last of these sellers often result in a climatic sell off resulting in sharp move down in the markets as a violent convulsion down squeezes out the last of the investors that had been holding on. The market stands at the abyss on death’s knell causing much of Wall Street and Main Street to feel the dull pain of impending death of what they have understood to be modern day capitalism. Doom and dread is everywhere….on TV, cable financial news, in the newspapers, in the classrooms, on the cover of magazines, and in every barbershop and hair salon everyone talks of the end of the markets.

Then, as the last of the sellers receive their stocks sell slips a stirring begins again in the markets. Suddenly, volume begins to pick up and a huge rally takes place but is discounted as short-covering by the short sellers. A few days later, another rally takes place on higher volume and again is ignored. New stock leaders begin to see new levels of volume pour into their shares as big institutions and money managers begin to take positions but, still, the individual investors stay away out of fear.

Over the coming months, the pessimism of Wall Street gives way to caution with all the talking heads giving glowing commentary again about the huge prospects for the economy and hot IPO’s (initial public offerings). Institutional money is still pouring into new leaders in the stock market and smaller investors begin to wonder if the rally is for real. Those that do decide they will participate but only when stocks “get a little cheaper” but they never do.

Soon, the new leaders are rocketing higher and higher while investors feel they are missing the boat and begin to buy without noticing that the general market appears to be stalling and coming under distribution. A few weeks later, as investors are now back in the market the market appears to decline again with investors caught in the crosshairs again.

This cycle is played out over and over again as the general market’s manic condition creates an emotional whirl storm that investors get caught up in and allow themselves to become victim to.

Average investors allow themselves to fall victim to this cycle of extremes because they come into the market with no plan or method to trade. They buy on tips from there brother-in-law or because a stock is reputed to be a “good company”. These are not plans or methods they are gambling.

A fundamental key to winning then is to realize that successful trading is counter-intuitive compared to how the general public approaches the markets. Having a method or system that allows you to exploit an advantage helps but, ultimately, even the greatest trading method ever devised helps no one trade successfully if they don’t realize there are certain underlying truths to making big gains in the market that are counter-intuitive to the way most people attempt to win at trading.

Now, that you can see a little how these cycles form and are repeated we will journey together to learn how not to be swept up in a tsunami of negative emotional turmoil due to unnecessary losses by following the crowd and/or our own faulty reasoning in future posts.