The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

1.2. THE ABILITY TO TAKE RISK

In the hedge fund universe, one's ability to take risk is essential. In effect, you must be able to assess the individual's capacity to function in terms of outsized performance targets, his ability to listen, and his ability to incorporate and process critical feedback about his performance by reviewing risk statistics with the risk manager so as to find ways of changing his trading and portfolio management behavior in order to improve his overall performance. The individual's past history can provide a clue as to how he is going to handle decision making in situations where he has insufficient information, how well he will be able to build a team, and how he is going to manage toward greater performance. If an individual is too cautious or too thorough, or in a psychological sense too perfectionistic, he is likely to have difficulty in adapting to a goal-oriented, high-performance approach to portfolio management and as such might not be a good candidate. In addition, it is important to screen out traders who are too impulsive, impatient, and perhaps irrational risk-takers and lack sufficient cautiousness and thoroughness to keep from blowing up.

By looking at a trader's profitability, or P&L, his percentage of winning trades, his slugging ratio or W/L ratio, as well as his Sharpe ratio and other risk statistics from his previous job, it is possible to identify certain behavioral patterns that are reflective of his overall past performance (i.e., ...