Short momentum sign, long holding period:

Note the preponderance of small positive daily gains punctuated by the occasional larger loss. And here is another example:

This second graph covers a far longer period than the first (note--throughout this and other articles, I have removed dates from the graphics to protect the anonymity of the traders concerned, many of whom I have personally managed), and belongs to a totally different individual. The first graph above belongs to aFinancial futures spreader, who had a so-called "value" approach, buying weakness and selling strength, adding to a position as it went against him, and cutting as he got into the profit region. The second graph belongs to a metals options dealer, who very typically ran a short volatility (short gamma) book, and over-hedged in the direction of he perceived the next short-term move to be. In the second case, the options did the "work" of creating a negative momentum position---one that typically got shorter on the way up, and longer on the way down. Yet the two bear a strange resemblance---the same look and feel.

A good short momentum sign trader will typically have a large amount of small gains, with the occasional larger loss. This effect will come through the graphical analysis very clearly, whether it is the end result of trading technique, or short-gamma position.

Long momentum sign, long holding period negative risk aversion

Note the preponderance of small daily losses in contrast to the occasional large gain. This style is almost an exact converse of the first style shown before. Here again is another example:

In the above two examples, we have a trader in a dry spell and a profitable trader, respectively. Note the effect of the positive momentum style: Both individuals had a tendency to buy a trend, and to ride their positions, adding on as they became profitable. In both cases, the spikiness is to the upside; they exhibited a multitude of small losses, punctuated by the occasional large gain. This type of style is the hallmark of the long options position as well, which typically gets longer on the way up and shorter as the market declines. In time-line terms, the long options position exhibits many days of decay, with the occasional large spike.

Long momentum, short holding period (day trader)

Note, in the following graphic, the relative flatness occasioned by an extremely short holding period.

Another example. Note the etch-a-sketch quality that the day-trader generates:

What we are seeing here is the effect of daily measurements on traders who go home without a position. In general, the day trader tends to be extremely risk-averse, and the effect of closing out his position will serve as a temporal stop-loss as well. The day traders here are long momentum traders; witness the large spikes on select days.

The Spreader

Not all traders fall into the prototypical categories of extremes on the momentum and holding period axes: The majority of folks exhibit more moderate characteristics, and at times may even try alternate styles to their norm. Moreover, there is another characteristic in the middle --- the spreader, or relative-value trader. Consider the graph below:

This graph exibits a certain waviness with respect to the daily P/L oscillations, together with a similar, larger oscillation in the cumulative P/L. This is more typical of a "relative value" trader---a category that includes arbitrageurs, and options ratio traders, among others. This individual's holding period is, moreover, shorter than the long holding periods of the first two sets of graphs, yet certainly the trading signature bears none of the hallmarks of the day trader either.

Looking at the P/L path of the above graph, we can see that there is a story being told, yet we cannot ascertain with any certainty just what is causing this particular behaviour. In such cases, it is best to look at trading sub-accounts (to the extent that they may be available). Here is the complete picture:

This particular trader had positions in two trading centres, which, as it turned out, bore a negatively correlated P/L relationship. In this case, we are looking at a composite P/L, put together by a trader who was using a degree of negative correlation to construct an orthogonal set of positions. The effect would have been the same had this been outright arbitrage between centres, such as IPE/Nymex or LME/Nymex, or any other of a number of other relative value situations.

Summary

Most traders do not, unfortunately, fit so neatly into prototypical patterns. Yet through the graphic trader signature analysis, one can discern a great deal of information about a trader's psychological makeup, as well as the profit/risk path likely to be encountered, if one does the analysis against the background of the relatively pure prototypes pictured here.

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