Our previous article focussed on the final aspects of a good trading plan and the behaviour of traders and the market in general. Now that we neared the end of the ten tenets series, we can focus on the final few attributes you will have to adopt, to become a successful trader. This begins with the general classification of traders and how the traders in each category react to different market conditions. These categories are based on the behaviour of a trader instead of the time frame they trade on, like intraday, positional or long term.
Types of Traders
Based on their attitude, composure, and mindset during the different phases and trends of the market, traders can be broadly classified into subjective and objective traders. What are the pros and cons of each type? And what is sustainable in the long run?
Most traders get into trading without clearly defining the type of trader they want to be. This is because there is a lot of grey area when it comes to managing an attitude of objectivity throughout their trading career. There are several factors like age and risk appetite which also affects the behaviour of traders. Here, we aim to demystify the differences between being a subjective and objective trader and tell you why it is better for your trading career to be an objective trader.
Subjective traders often take market decisions based on instincts and experience. They go by the historical behaviour of the market instead of sticking to a trading system with a clearly defined entry, exit, and stop-loss. They take judgemental decisions instead of using fundamental or technical analysis. They could be adept at determining the direction of the market based on political or international events. For the outsider, their trading style might seem random but it comes with years of experience.
If subjective traders rely on one kind of analysis, it is sentimental or psychological analysis. They will mostly rely on forums and news to understand the views of the experts and then place an order. The market has a unique way of surprising subjective traders though. Another thing that subjective traders mostly take for granted is the stop-loss. They believe that the market will inevitably move in the direction they expect it to move. But in the case of a major pullback by the market, their capital will be locked in their current position, not giving them the opportunity to use it for other winning trades.
Traders who have an explicitly defined trading system with set rules for entry, exit, and stop-loss, are called objective traders. They are unmoved by the sentiment of traders and analysts. With a proper risk management system in place, they ensure that they are protected against heavy drawdowns. These traders only enter the market if certain stocks meet their criteria for trade. They still keep an eye out for news and events before entering a trade to ensure that they are on the same side of the market.
The simplicity of objective trading transcends the methodology of subjective trading. The trader does not interfere with the system until either the target or the stop-loss is met. Whereas in subjective trading, a trader might let his profits run until his own profit target are met.
Why is Objective trading better for you?
It takes years of experience and learning from mistakes to become a pro subjective trader. If you are a beginner, we strongly recommend that you do not try to gauge the market based on news and events. If your decision turns out to be wrong, the repercussions could wipe out a significant portion of your capital. Instead, you could let the storm pass and wait for the market to stabilise to start trading again.
While developing a profitable strategy might be tough, being an objective trader is far easier than being a subjective trader. This makes it perfect for beginners and those with limited capital to start trading. Subjective traders often allow greed and fear to drive their trading motives without accepting the reality of what technical and fundamental analysis indicate. An objective trader, on the other hand, would not be bothered by the outcome of his trades as long as he/she is properly hedged to manage the risk.
Being a subjective trader requires:
- Large capital to withstand heavy drawdowns.
- Ability to perform sentiment analysis.
- Decades of market experience.
- Flexibility to change entry and exit depending on the current market climate.
- Mental ability to withstand market whipsaws and pullbacks.
Being an objective trader requires:
- Limited capital.
- A profitable trading system with predefined rules.
- Limited experience.
- Robust risk or money management.
- Keeping emotions out of trading
While the possible profits an objective trader can make might be limited due to the strict exit rules, it is definitely the most sustainable trading model in the long run. For beginners, being a subjective trader could be demoralizing if multiple entries turn into losses. Although it might be difficult for beginner traders to keep their emotions at bay while trading, it is important to cultivate that habit. And being objective can go a long way on reducing the stress one might experience while trading. Happy trading!