We analyze how gender and age, internal characteristics of futures traders one that remains fixed while the other changes over the lifetime and the security being traded, an external factor, are related to the disposition effect by separately tracking their trade-by-trade transaction histories over a period of 33 months on the Taiwan Futures Exchange (TAIFEX). We show that women and mature traders, compared with their male and younger counterparts, exhibit a stronger disposition effect. The effect is also stronger among traders who trade financial-sector futures contracts than those who trade electronic sector futures contracts. Further test results provide convincing evidence that the disposition effect indeed is related to both internal and external factors.
According to Commodity Research Bureau 1 (CRB), fewer than 25% of all futures traders are successful. Surveying the top traders who consistently make hundreds of thousands—even millions of dollars—each year, CRB compiles “50 Rules of Futures Trading.” Among these rules, six are related to how to deal with unrealized gains and losses and the most familiar ones are “cut your losses short” and “let profits run.” 2 Similarly, veteran futures practitioners advise that to be successful traders need to control emotion and adhere to a trading plan. A major component of such a plan is to manage trading risk by establishing thresholds to limit losses and establishing objectives at which profits are to be taken. Simple risk management rules they attribute to a trader’s overall profits are the same: “cutting losses and letting profits run.”
Examining investors in aggregate in various markets, voluminous studies have documented that instead of following these well-known rules of successful trading, average investors behave just the opposite. They exhibit the disposition effect, i.e., the tendency to hold onto losses too long but realize gains too readily. Going beyond the aggregate investor approach followed by most studies and by tracking the trade-by-trade history of each individual trader on the Taiwan Futures Exchange (TAIFEX), this study extends this research by conducting an in-depth examination of the variations in the disposition effect among traders and how such variations are related to internal biological characteristics such as gender, an enduring trait that remains fixed over the lifetime, and age, which changes over time.