How to Ditch Bad Trading Habits for Good: a Strategy for Success

Let’s start with the bad news.  The bad new is that there is no two ways about it, trading is a stressful game.   Inexperienced traders in particular are susceptible to fall victim to their emotions, and as such, create bad habits that they subconsciously default to time and time again.

That’s the bad news.  The good news is that when it comes to breaking bad habits and replacing them with good ones, a little discipline and patience goes a long way.

Bad Habits and How they Are Formed

Newbie traders are particularly inclined to fall victim to forced trading.  When a trade is forced, an experienced trader will come to believe a move is impending without any actual confirmation that this is what is going to happen.   Because there is no logical explanation for the trade, the results of a forced trade are subject entirely to chance.  The trade is literally a gamble.

Sometimes a trader will luck out and the forced trade will work out in their favor.  However, even if a forced trade is successful it will serve to psychologically enforce the habit.  And no matter what, a trader who gets in the habit of forcing bad trades is bound to get burned.  It is only a matter of time.

How Emotions Play In

So why is this habit so pervasive amongst new traders?  Quite simply put, the emotional component.  When a trader forces a trade, they are letting their emotions control the decision making process.

Further adding fuel to the fire, when a bad trade occurs, an experienced trader will often panic and shift focus from the big picture to the specific profit & loss margin. The result is more often than not an emotionally fueled reaction that leads to even worse decision-making in the future.

But that is only the beginning of the cycle.  The more that a rookie trader defaults on emotions, the more psychologically embedded this type of reactionary behavior becomes.   The end result is a bad habit.

How To Build Good Habits

Okay, so we have identified one of the most pervasive rookie mistakes out there and why it happens.  Now the question becomes, what to do about it?

The answer sounds suspiciously simple, but here it goes.  The key to good trading is being able to explain the reasons for the trade.

The key principle underlying this technique, and successful trading in general, is that a trader should always be able to objectively explain a strategy used for executing a trade.   It sounds easy, but it is easier said than done.

And for anybody still feeling skeptical, why not test it out?  Ask any prosperous trader and they will always be able to tell you in concrete terms how they pull off the successful trades that they do.

A Method for Success

To make things simple, we have broken the general principle down into a fail-proof procedure.  The key to success is to make sure that these steps are followed religiously, no exceptions.   Be sure to keep a detailed log of every step for every stage.  And yes, this means for every trade.

So without further ado, here are the steps to ensure concrete improvement in any trading strategy.

#1. Strategize

The key to successful trade strategy is building good trading habits.  This means building and sticking to a daily routine that includes patiently monitoring a feasible number of possible contenders.  This also means setting definitive target goals and stops for each potential trade.

#2.  Execute

This is the stage where the actual trade takes place.   As a rule of thumb, this step should not be done ahead of the strategizing step.  Sticking to this procedure will break the habit of forcing the trade.

#3. Calculate & Review

Now take a few minutes to compare the actual trading results with the projected trading results.  If the numbers are dramatically different, write down some possible factors that led to the discrepancy so that this can be taken into account in the strategizing stage next time.

#4.  Revise

This final step involves comparing the results of the most recent trade with the results of the trade that occurred before it.  If the most recent strategy leads to improvements, this is the new strategy to be used going forward.  However, if this is not the case, then the plan is to ditch the new method and stick with the previous one.   As statistics keep building, the trading strategy will become increasingly refined.

Why It Works

Why does this process work?

This process draws on three crucial foundational practices for building good trading habits:

Managing Accounts:  Each respective stage of the above method involves keeping detailed records.  It is only after the process is applied repeatedly that good habits will begin to become second nature.

Adopting an Objective Stance:  The other key good habit that the technique relies upon is learning to acknowledge what is working and what isn’t.  Being able to look at one’s own work objectively and unemotionally is the mark of professional maturity in any discipline, and trading is no exception.

Comparing Results:  This technique is fail-proof because is statistically objective.  No need to stop at personal results, however.  Try comparing results with more experienced traders.  This is a great way for a new trader to step out of their own shoes get insight as to how to improve their performance from a perspective outside their own.

The Nuts & Bolts:  The Importance of Emotional Control

Remember that emotions are an inevitable part of being human, and are bound to interfere from time to time.  If ever feeling overwhelmed, it can be a good idea to take a short break or implement a few simple stress-management strategies.

Above all, don’t forget that making mistakes is part of the game.  Every error presents a first-hand opportunity to learn and improve.  So next time, rather than react emotionally when things don’t go as planed, rather try to use the experience an opportunity to fine-tune a professional technique.  This attitude will ensure positive results in the future.

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