I recently received an email from a reader of my blog, asking a question that resonates deeply with many traders:
“What’s the most effective way to break bad habits? I’m working as a full-time trader and 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 I picked up 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?”
This is a great question, one that touches on a challenge many traders face. Breaking bad habits is essential for long-term success, not just in trading, but in any discipline. Over the years, I’ve developed a strategy for breaking bad habits, and I’m confident it can help you too.
Understanding Common Bad Trading Habits
Before we dive into the strategy, let’s identify some of the most common bad habits traders struggle with:
- Chasing trades due to the fear of missing out (FOMO)
- Manufacturing trades out of impatience
- Cutting winning trades too early
- Letting losses grow too large
- Adding to a losing position
- Earning profits in the morning and giving them back in the afternoon
- Risking too much money for your account size
- Revenge trading after a loss
These habits can be detrimental to your trading performance, but to break them, we first need to understand what a habit is and why these particular habits are harmful.
What Is a Habit? Why Are They Bad?
A habit is an action we’ve taken in the past that our brain has learned to use as a solution for similar situations in the future. If something worked once, our brain tries to replicate that action whenever a similar scenario arises.
The problem with habits is that they can become automatic, leading us to apply the same solution inappropriately across different situations. Our brains are wired to conserve energy, and habits are a way to achieve that by reducing the need for active decision-making. However, this can lead to problems when the context has changed, but the habit remains the same.
For example, imagine a child who throws a tantrum to get what they want. If the parents give in, the child learns that tantrums are an effective way to achieve their desires. As the child grows up, they may continue to use this strategy, even though it becomes increasingly inappropriate and ineffective in adult situations.
In trading, this could manifest as a trader who refuses to cut losses because, in the past, holding onto losing positions occasionally led to a profit. The brain registers this as a valid strategy, even though it’s fundamentally flawed.
I can recall a time early in my career when I decided to add to a losing position instead of taking a loss, hoping the market would bounce back to my entry point. By sheer luck, the market did recover, and I ended up making a profit. The problem was, this success reinforced a bad habit. The very next day, I tried the same approach and nearly wiped out my entire account. This was a painful lesson, teaching me that the market doesn’t always recover, and such a strategy is not sustainable.
This brings us to one of the most challenging aspects of day trading: you can make a terrible mistake, yet still make money due to luck. This can reinforce bad habits, making them harder to break. The market might give you a lucky break once, but it will almost certainly teach you a much harsher lesson later, often with a lot more money at risk.
How to Break Bad Trading Habits
Now that we understand what habits are, how they form, and why they can be so harmful in trading, let’s discuss how to break them.
I like to think of a habit as a series of dominoes. Once the first domino is triggered, it sets off a chain reaction of decisions and actions. For example, you take a trade, it goes against you, and the first domino falls. You then decide to move your stop-loss further back—another domino falls. Next, you double down on your losing position—yet another domino falls, and so on. Before you know it, you’ve made a series of poor decisions that could wipe out your account.
The key to breaking bad habits is to replace them with good ones, essentially creating a different set of dominoes. Instead of letting that first domino trigger a series of bad decisions, you need to set up a new sequence that leads to better outcomes.
Create a New Series of Dominos
I once worked with a client who had a severe problem with decision-making when money was on the line. He would freeze up, paralyzed by fear, and often lose a lot of money. My advice to him was simple: “Don’t think so much. You have a plan; just execute the plan.”
I gave him a copy of my trading plan, complete with specific rules to follow. All he needed to do was knock down the first domino—execute the plan. When you’re in the heat of the moment, with money on the line, it’s hard to make the right decisions. That’s why having a clear set of rules is so important.
The next time a trade goes against you, you need to have a series of decisions already made. This is your game plan, and it’s what will guide you through the most challenging parts of your trading day.
Don’t Change the Plan During the Game
One of the most critical pieces of advice I give to traders is this: “You don’t change the game plan during the game.” If you want to make changes, finish this game, make your adjustments, and then start a new game.
You can’t trust your instincts during the trading day, especially when things start going wrong. Your habits, especially the bad ones, will try to take over, and you’ll be tempted to make decisions that aren’t in your best interest.
When the market opens, your job is to execute your plan. If something goes wrong, you need a plan in place to deal with it. This is where your series of dominoes comes into play.
- What are you going to do if a trade hits your first target?
- What’s your plan if a trade moves against you?
- How many losses are you willing to take in a single day?
- How many winning trades will you take before you stop for the day?
These decisions need to be made before the market opens. My job every morning is to follow the plan I’ve already defined, not to make it up as I go along. At the end of the day, I update my journal, review my performance, and make any necessary adjustments to my plan for the next day.
Replace Bad Habits with Good Habits
Breaking bad habits isn’t about eliminating them entirely; it’s about replacing them with good habits. But how do you do that? The answer lies in having a detailed trading plan with specific rules that cover all possible scenarios.
This isn’t an easy process. It requires discipline, self-awareness, and a willingness to learn from your mistakes. If you’re working for a trading firm, they’ll provide you with these guidelines. If you’re working with me, I’ll help you create a plan. And if you’re doing this on your own, it can be done, but it will require time, effort, and persistence.
The Power of a Trading Plan
The importance of having a solid trading plan cannot be overstated. A trading plan is more than just a set of rules; it’s a blueprint for success. It’s what keeps you grounded when emotions run high and helps you make rational decisions in the face of uncertainty.
Here are some key components of a robust trading plan:
- Entry and Exit Criteria: Define the specific conditions under which you’ll enter and exit trades. This removes guesswork and ensures you’re not making impulsive decisions.
- Risk Management: Determine how much of your account you’re willing to risk on each trade. This will protect you from significant losses and help you stay in the game longer.
- Position Sizing: Decide how many shares or contracts you’ll trade based on your account size and risk tolerance. This ensures you’re not overexposing yourself to risk.
- Contingency Plans: Have a plan in place for when things go wrong. This could include setting stop-loss orders, taking partial profits, or deciding how many losses you’ll tolerate in a day before stepping away.
- Routine Reviews: Regularly review your trading performance and make adjustments to your plan as needed. This helps you stay on track and continually improve.
By having these elements in place, you create a structured environment that makes it easier to develop good habits and break bad ones.
Conclusion
Breaking bad trading habits is a process that requires self-awareness, discipline, and a well-structured plan. Habits are formed because they once worked for us, but in the fast-paced world of trading, a habit that once brought success can quickly lead to failure if it’s not appropriately managed.
The key to breaking these habits lies in understanding their origins, recognizing the situations in which they occur, and systematically replacing them with good habits. This is achieved through the development and execution of a solid trading plan—a plan that anticipates the challenges you’ll face and provides clear guidelines for how to navigate them.
Remember, you’re not alone in this journey. Whether you’re part of a trading firm, working with a mentor, or going it alone, the process of breaking bad habits and replacing them with good ones is something every successful trader has gone through. It’s not easy, but it’s entirely possible with the right approach and mindset.