Monday, November 13, 2017

How to Break Bad Habits | Trading Psychology

Today’s Trading Psychology question of the day…

“What’s the most effective way to break bad habits?  I’m working for a trading firm and they have strict rules of risk-management.  I’ve learned the rules, but I can’t seem to stop making mistakes because of some bad habits that I learned when I was trading on my own.  I need to correct these bad habits or I’m going to lose this job.  Any advice on breaking a bad trading habit?”

Great question… and I can definitely help with a strategy to break bad habits.  I could write the book on bad habits, and I think I have an effective strategy for breaking them down.

Common Bad Trading Habits would include…

·        Chasing Trades Because of the Fear of Missing Out
·        Manufacturing Trades Because I couldn’t stay patient
·        Cutting Winning Trades Too Early
·        Letting Losses Get Too Large
·        Adding to a Losing Position
·        Earning Profits in the Morning & Giving Them Back in the Afternoon
·        Risking Too Much Money for My Account Size
·        Revenge Trading (After a Loss)

As you can see, I could write the book on bad habits, and if we want to break those habits, we first need to understand them a little better.

What is a habit? Why Are They Bad?

I think of a habit as some action I’ve taken in the past, which worked to solve a problem in the past, and now my brain thinks this is acceptable to use for all relevant situations in the future.

In other words, if it worked in the past, our brain will try to use it again in the future.

We run into problems, however, when our brain gets lazy and thinks it can solve all problems with the same actions.  Our brain is always trying to save energy, and it uses habits to do that for situations it deals with most commonly.

Take for example a child who has a temper tantrum when he/she doesn’t get what they want.  If the child’s parents give-in to the tantrum, the child gets what he/she wants, and then grows up into an adult and the brain assumes that throwing a tantrum will solve the same problem as an adult.  I’m sure you know a few adults like this.

As you can imagine, the habit that was developed as a child, doesn’t work as an adult, and it begins causing problems with relationships, work, etc.

I remember one time early in my career, rather than taking a loss on a trade, I decided to add to a losing position, hoping the market would come back to my point-of-entry, which it finally did, and I actually ended up making a profit on the trade.

The problem was… I tried the same technique the very next day, and lost almost my entire account.  As it turns out, the market doesn’t always come back to your point-of-entry… lesson learned, and I never did that again.

This is one of the reasons why day trading is so hard…

You can literally make a horrible mistake (like adding to a losing position) but by the stroke of luck you can make money at the same time!

The down side to this is… you may have been given a lucky bounce on that mistake you made, but the markets will most likely teach you the REAL lesson with a LOT more money at risk the next time it happens.

I remember having the best day of my trading career, and then losing twice as much money only 24 hours later… I made the money with a bad habit… and the market took it all back, plus some, and taught me a lifelong lesson…because of that bad habit.

How do we break that bad habit?

So, now that we know what habits are, and how easy it is to develop these bad habits, and why trading is so difficult because it’s easy to make money by sheer luck, unknowingly building the habits that will eventually come back to haunt us in the future… now let’s talk about breaking those bad habits.

I think of a habit like a series of dominoes… once the first domino is triggered, it sets-off a series of decisions that ultimately will help you or hurt you.

For example, … If I take a trade, and it goes against me… the first domino falls, and I make the decision to move my stop-loss further back… and the next domino falls.

Then I decide to double-down on my losing position, and the next domino falls, etc.

Before long, I’ve made a series of bad decisions, based on actions that worked in the past, but now I am on the verge of losing all the money in my account, updating my resume, and going back to my 9-5 job.

If you’re a trader, you know these series of events… and it all starts with the first domino, and a series of decisions that follow.

So, if we want to remove bad habits, we need to replace them with good habits.

In other words, we need to create a different set of dominos… a different set of decisions.

Create a New Series of Dominos

This reminds me of a client that I worked with a few years ago… he had a horrible problem with making decisions when money was at risk.  He would freeze up, became paralyzed with fear, and lost a lot of money in the process.

My advice to him was… “Don’t think so much, you have a plan, just execute the plan.”

In other words, I provided him with a copy of my trading plan, and all he needed to do was follow the specific rules of that plan, simple as that.

I gave him a new series of dominos, and all he needed to do was knock-down the first domino and execute the plan.

Remember, it’s hard to make correct decisions when you’re in the heat of the moment and there’s money on the line.  This is why having a clear set of rules is so important.

So, the next time a trade goes against you, you need to have a series of decisions that have already been made beforehand. 

You need a game plan to get you through the hardest parts of your trading day.

And speaking of the game plan...

Don’t Change the Plan During the Game

Another thing I want to point out is that you cannot change the game plan DURING the game.

I have a saying in my trade room…

“You don’t change the game plan during the game.  If you want to make changes, finish this game, make your changes, and then start a new game.”

I say this because you can’t trust your instincts during the trading day, and you certainly can’t trust those habits of ours to make the right decision for your trading career when you’re losing money.

When the opening-bell rings, your job is to execute the plan, and when something goes wrong, you need to have a plan in place to deal with the decisions that come with it.  You need a series of dominos.

·        What are you going to do if a trade goes to your first target?
·        What is your plan if a trade goes against you?
·        How many losses are you willing to take in any given day?
·        How many winning trades until you stop for the day?

My job every morning is to follow the plan that I have already defined…not to make up the plan as I go.

At the end of my day, I update my journal, I read my journal, and I make educated decisions (not emotional decisions) on what the game plan should be tomorrow, and I keep evolving from there.

So… how do you break a bad habit?

You replace them with good habits.

How do you replace them with good habits?

By having important decisions already made for you… because you cant trust yourself when there’s money on the line.

You need a trading plan, with specific rules, that cover all possible scenarios for that day.

This isn’t easy, but if you’re working for a trading firm they will provide those for you…

…or if you’re working with me, I will provide those for you.

…and if you’re trying to do this alone, it can be done slowly, but you have your work cut-out for you to do this step by step, day by day to formulate those rules.

What a great lesson today… we all have bad habits to break, and now you have a deeper understanding of what it takes to do that.

Guys… I hope you found value in today’s trading psychology lesson…

…and I would love to hear from you about additional topics that you’re struggling with as traders.

Do me a favor…drop me a comment below this video with any topics you’d like to see me cover in my trading psychology video…

…make sure to give me a thumbs-up if you found value, and share it with a friend who can benefit from this information as well.

It doesn’t matter what market we trade, or the strategy we use, even the best traders battle with their emotions when there’s money on the line.

And don’t forget, you can find me every morning @ 8:00am EST in my trade room with all of our members here at, I have a great free trial on the homepage of our website, I publish my Nightly Newsletter every evening on my blog before 8:00pm EST, and I’m excited to see you again soon on my next trading psychology lesson.

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