In everyday life, bad habits can have any number of side effects. Weight gain, illness or social exclusion, for example.
Bad trading habits, by contrast, affect people in just one way.They lose money.
Letting costly habits creep into your trading is all too easy to allow. After all, you don’t have a boss to tell you what to do, what not to do, how and when to do it, and you can risk as much as you like.
Whether you are a beginning trader or a seasoned one, it is easy to entertain bad habits that are keeping you from your full earning potential. It’s most likely that you don’t even realize that specific behaviors are holding you back.
Instead of looking at the realities of a potential trade, you could be seeing something different through filters you have established.
These can become habits that will affect the decisions you make when trading. Don’t be held back by bad habits! Learn to recognize them so you can experience better outcomes on your trades.
As a trader, you don’t consciously respond to everything the market throws at you. As you gain experience, you form trading habits. And these habits have a significant impact on your trading results.
According to a study from Duke University, 45% of our behaviors are habitual. [link to paper] If this applies to your trading, it means that your trading habits explain 45% of your performance.
Hence, to trade better, you must cultivate good trading habits and eradicate bad ones.
Few Bad Trading Habbits
Failing to Manage Your Trading Risks
Maybe the problem is that you’re constantly holding on to trades gone bad. Or maybe it’s that you don’t know at what point a trade turns “bad,” regardless of whether it reverses or not.
Remember that a “bad trade” isn’t always a trade that loses money. That’s the outcome of a trade. A bad trade is one that you didn’t strategically envision or control from start to finish.
It sounds tricky, but here it is:
- A bad trade that ends up with a profit is called “luck.”
- A bad trade that ends up losing money is just a bad trade realized.
- A good trade that ends up in profit is well-executed.
- A good trade that ends up losing money is a statistically expected drawdown.
Profits and losses are all part of the trading enterprise. You need to expect both but in relation to a statistically favorable model (whether real or hypothetical).
No trader in the right mind would ever adopt a system or methodology that’s proven to fail from the get-go. Yet many traders hold on to systems that consistently drain their capital.
So if your trading approach is consistently losing, then either a) you didn’t vet the approach thoroughly beforehand, b) you don’t know how to assess a given approach (which is crucial), or c) your approach doesn’t come with a solid risk management strategy.
How to Fix It: Before you adopt any trading method or system, be sure you evaluate what you’re about to adopt. Make sure the data sample is large enough to sufficiently represent how it has performed over time. If you don’t know how to evaluate a system (and there are numerous ways to do this), spend a lot of time learning how to do it.
When you place a trade, you have to know not only the odds of the system you’re using but, on a tactical level, where your entry and exit points are, the size of your position, and the impact the trade might have on your overall capital should it turn out to be a losing trade.
Revenge Trading After Taking a Loss
If you’ve ever read Sun Tzu’s The Art of War, then you understand the general principle of not rushing into battle. As he carefully states (and we paraphrase), you can’t ever force a win, but you can always be prepared to seize the advantage when it presents itself.
Revenge trading, particularly after taking a loss, is an emotionally driven attempt to force a win. It’s anti-productive, anti-strategic, luck-seeking, foolish, and all too common among undisciplined traders.
There is no system that incorporates revenge trading into its strategy. So, if you catch yourself revenge trading, either you’re trading without a strategy, or you’re going against your strategy.
How to Fix It: Follow your strategy. If an opportunity presents itself, then take it. If it doesn’t, move on. The “fix” is to tame your impulses.
If you can’t do it, then you might want to call it quits on trading or change your trading approach to something that might better suit you, whether it’s day trading, swing trading, position trading, investing, trying your hand at a different asset class, or hiring a professional to manage your portfolio.
Jumping From One System to Another
Believe it or not, some people just can’t handle drawdowns, even in favorable (or winning) systems that provide historical drawdown stats.
If a system has an “average” drawdown of -30% and a worst-historical drawdown of -50%, then you shouldn’t be worried unless the current drawdown exceeds the worst-historical drawdown.
If it does, then you have to consider whether the current drawdown is the “new” worst-historical drawdown and will recover, or if the system is really just beginning to fail. But nevertheless, some people will panic even if the drawdown hovers around average.
Some traders will “ditch” a system to jump on another one that’s performing well–but only to catch its drawdown. They will ditch that system and jump into another one again, catching that system’s drawdown.
In the end, some traders will have caught the worst performance of several systems that ultimately performed well. If this is you, then you’re in trouble, and your depleted trading account is proof of it.
How to Fix It: Pay attention to the average and worst drawdown of your system’s stats. Don’t panic if your drawdown hovers around the average. If it plunges below the worst historical drawdown, then you’ll have to re-evaluate the strategy.
Either it’s established a new worst historical drawdown, or the system is beginning to get outdated and might no longer be effective.
Not Sticking to Your Trading Plan
Why deviate from your trading plan if you’ve fully analyzed it and have decided that you have full confidence in its performance?
If you’ve deviated from your system for no reasons concerning the “tweaking” of its mechanisms for improvement–meaning, you’ve thoroughly studied the impact of your alterations beforehand–then you’re simply being undisciplined.
This bad habit is a matter of personal impulse and distraction. In many cases, however, it reflects a lack of confidence in the system. And it’s your job to figure out whether your lack of confidence is justified or not.
How to Fix It: If you deviate from your system because you’re not entirely convinced that it can work even if you’ve thoroughly evaluated it, then developing greater discipline is the only solution. If you deviate from your system because you don’t have sufficient capital to trade, then stop and come back when you have sufficient capital.
But if you deviate from your system because you haven’t fully thoroughly evaluated your system, then stop trading and evaluate it (and don’t do that again).