Some people chew their lips or fingers while others eat pens (I am guilty of this one!). Bad habits come in all shapes and sizes and most of the time we are hardly aware of them until someone points them out. In trading though, our bad habits don’t just annoy those around us, but directly affect our financial (and mental) well-being. The challenge is that often there is nobody to point them out.
I’m sure most of you have read or heard about the importance of keeping a trading journal – a blow-by-blow diary of what you did and how you felt while doing it. When you inspect this journal, as you should on a fairly regular basis, patterns will emerge. Your own behavioural patterns.
Now sure, trading is essentially fancy on-going decision making; and it is our job to try and make the best quality decisions. However there are moments when you go into autopilot, which can yield really good results when they happen under the right circumstances. You feel the flow of the market and you are just trading. Perfect. That is the goal.
This autopilot mode can also be destructive. This is when the bad habits take over. Take the following timeline for example: That trade running against you is really starting to stress you out because you entered it without a proper plan for the worst case scenario. Bad habit number one… not planning trades properly.
Because this trade is stressing you out, it is the only stock that you look at. Bad habit number two… getting too focused on the short term.
Because you are looking at it all the time you start adding to it every time there is an uptick because “hey, you can’t be wrong after all, right?” Bad habit number three… adding to a losing trade.
Now this position is getting bigger and is running further against you, which stresses you out more, because now it is eating up your free cash and starting to put pressure on your margin situation. Double bad habits here because you’ve traded too big and you’ve thrown your risk management rules out the window because “this situation is unique”. We’ll call them bad habits number four and five.
The now massive losing trade has become your only focus and you start to cut winning trades in order to fund the now giant loser. Bad habit number six… cutting winners, riding losers.
You’re probably reading this and thinking that these aren’t really habits as much as they are choices, and you may be right, although I promise you that this happens so subtly that you don’t even realise it. Only when you go back and see the proof that you have done this over and over again and each time in a similar circumstance, do you realise that this is a behavioural pattern (or habit).
The bright side is that you can identify these patterns or habits and root them out. You just need to stay open minded and aware of your emotions and how those are influencing your decision making. Not an easy task. If it was, these habits wouldn’t be able to take root. It is possible though with the help of probably the most important good habit you can have, keeping a journal. Over time you will become more aware of your emotional state and the influence that it has over you, and ultimately you should be able to avoid falling victim to your own bad habits.