Most of us have daily habits that affect our everyday life. Waking up early in the morning is an example of a good habit while biting your fingernails is a bad habit that many people try to avoid. Many habits that affect our lifestyle are obviously good or bad, for example, as anything that leads to productivity is likely a good habit, while unhealthy habits are easy to recognize. When it comes to trading, the unfortunate reality is that good and bad habits aren’t as black and white. In some cases, traders even mistake bad habits for good ones. You might not even realize that you’re practicing bad trading habits at all! Here are some examples of bad trading habits:
- Revenge trading
- Breaking your trading rules
- Setting bad stop losses
- Not keeping a trading journal
- Practicing confirmation bias
The first step to breaking bad trading habits is actually being able to identify the problem. For example, traders that practice overtrading often get a high from trading and don’t stop when they should, which causes them to lose money. Others might practice revenge trading after taking a loss by thinking less about the moves they are making while risking more money to win back funds that were lost. Confirmation bias involves only considering data that supports your preconceived ideas, even though contradicting information is out there. If any of these sound familiar, then you can consider yourself guilty of practicing bad trading habits.
You’ll also want to take your self-imposed goals seriously, as breaking your own rules is still a bad habit. We need to set rules when trading, as it is all part of our trading plan. If you find yourself often deviating from the amount you said you’d risk, making trading moves that you said you wouldn’t make, or any of the above, you need to remember the plan you implemented or revise your strategy to work with your newfound trading personality. There are also other healthy habits you start, like keeping a trading journal.
Once you’ve identified your bad habits, it’s time to break them. Try following these simple steps to train yourself not to make the same mistakes:
- Identify your bad habits
- Ask yourself why the habit is bad. How does it affect your profits?
- Replace the bad habit with a good one
This may seem overly simplified, but it works. For example, say that your bad habit is the fear of losing money. You set your stop loss for every trade according to your trading strategy, however, you often find yourself tightening your stop loss because you are so afraid of losing money, even if the trade is winning. Once you identify the problem and move on to step 2, you might realize that you’re actually cutting into your profits because many of these trades would have gone on to make you even more money, had you only left them alone. All you have to do to break this habit is to leave your trade alone in the first place and you’ll begin to make more profits. Other habits might be harder to break, but you will feel more of a reward once you begin to realize that your trades are making more money.