In order to break bad trading habits, traders need to base success or failure on each trade by how they stick to their trading plans and not simply on whether they make or lose money.
- If you make a bad trade (that is, an undisciplined trade, one not part of your trading plan), but make money on it, you still have to view that as a failure; you cannot congratulate yourself. By congratulating yourself, you are offering a small reward for something done incorrectly.
- If you make a good trade (one that fits your trading plan perfectly), and you lose money on it, you have to view it as a success because you followed our plan. It’s more likely we berate ourselves even though we followed the plan; in other words we punish ourselves for doing what we were supposed to do!
- If you lose money, you can then analyze the trades to see if the trading plan can be made more profitable. But, if you continue to reward yourself for undisciplined trades that make money, it will be very hard to change your habits because you are essentially conditioning yourself to make trades that do not fit within your trading plan.
- If we punish yourself for trades that you lose money on, but that fit within your trading plan, you are much less likely to follow our plan at all.So, you need to be honest with yourself and avoid accepting undisciplined trades – no matter how profitable they prove to be.
Making money on a “bad” trade – holding a massive losing position, only to have it come back leave you a profit – is one of the worst things that can happen to a trader. Tendencies such as these destroy traders over the long run. By trading like this, traders can come to believe that next time they are holding a losing position it will come back. Unfortunately, if this fails to happen just once, it could wipe out your trading account. The trader may also falsely believe that because jumping in and out of the market without paying attention made money yesterday, it might also work today. This is a risky way to play the market.
Once you understand how you are personally defining success and failure, you need to apply a process of reward and punishment to change these habits as quickly as possible.
Break your bad habits by being honest with yourself about how disciplined you are. Don’t deceive yourself into thinking you made a good trade, when in actuality you may have simply gotten lucky. Always stick to a well-thought-out trading plan. Define success as following your trading plan and reward yourself for doing so, regardless of profit or loss. Define failure in your internal dialog as not following your plan, and apply some form of punishment to this action (regardless of profit or loss). By strengthening the rewards or punishments, changes can be made quickly.