The increased presence of women in stock market trading

While still being a minority in an environment which is still largely male-dominated, the number of female traders is growing as we also notice from our portfolio of clients, allowing a behavioural analysis on the differences, if any, with their male peers in regard to their approach to investment and short-term trading and related performance.

As in any study of this kind, results must be taken with a grain of salt. The results would only approximate an average behaviour and the risk of biases, or skew due to unstructured, inconsistent data is definitely relevant and should always be taken into account. Therefore, “on average” will be repeated often in this piece.

That said, lets dive into the results of such studies which actually conclude that there is a noticeable difference on the approach which female traders have as compared to male traders and in the related results, in terms of performance, both in absolute terms and in risk-weighted returns.

One of the more prominent differences is in the way the two samples feel compelled to trade. The female traders tend, on average, to trade less frequently. They reflect more and, due probably to a higher risk aversion, tend to wait for the adequate set up to jump into a trade, which every good money manager/trader should always do. The market always presents trading opportunities and jumping into a trade out of boredom or just to feel the adrenaline is a potentially critical mistake.

It also seems like female traders tend to operate, on average, holding their position for a longer period of time, sizing their stop-losses further away from the entry point and tend to stick to their plan by not modifying the stop-loss, actually often closing the losing position before the price hits the stop-loss. On the contrary men tend to trade much more frequently, on shorter time frames and using tighter stops which they tend to move or even cancel as the price approaches, thus increasing their risk considerably.

Even their portfolio looks different, with females concentrating their investment in fewer instruments as compared to men, which allows them more focus and more control on their trading and investment portfolio. This element, positive at a first look, can be detrimental to an appropriate diversification of the portfolio of investment, thus increasing the overall risk, but if the investments are sufficiently uncorrelated one to each other, or chosen in order to hedge out the systemic risk, having fewer instruments to monitor is a great advantage. In general, we may say that there is higher tendency to risk avoidance in women as opposed to men which leads the former to reflect more and be more cautious in trading. This element might indeed limit the upside potential of the trading activity, leading to lower absolute returns.

At the same time though, it will probably reduce the volatility of such returns. As a matter of fact, a common mistake is to put too much emphasis on the absolute return of the portfolio, and disregard the amount of risk the trader took to achieve such returns.

In prop trading firms or in hedge funds, what the head of trading would look at is the risk weighted returns of a wannabe hedge fund manager: a trader able to return on average 3 per cent a month with a maximum drawdown of 0.5 per cent will be preferred to one returning 15 per cent but having a drawdown of 13 per cent, and a high standard deviation of his returns. Females seem to meet, on average, such requirements more than males, given their specific approach to the trading activity.

The reason of such differences has been linked to both the fact that females process information and evaluate risk in a different manner than males, and also to their physiological differences.

What I personally experience in evaluating traders is that the higher the level of knowledge of the risk aspect and of the psychological aspects of trading, with particular reference to the unconscious cognitive biases that affect those who face uncertainty, fear and greed, the narrower the differences in attitude, risk taking and returns. And that no matter the gender or any other difference. The above clearly highlights what matters the most in structuring a winning trading approach, irrespective any other element. Truth is that diversity is a value, and different approaches tend to naturally hedge each other. A properly structured fund should not only seek diversification in their investment portfolio but, even more importantly, should carefully diversify its floor of traders.

Roberto d’Ambrosio is the CEO of Axiory Global