Breaking Bad Trading Habits

“The human side of every person is the greatest enemy of the average investor or speculator.” – Jesse Livermore

Even among seasoned investors, bad trading habits can return. Trading losses can also come at a time when the market is doing particularly well, which adds to the frustration. All your indicators may flash “go ahead,” yet somehow, you manage to make another mistake.

Now, you might laugh it off as “paying your tuition to the market.” But how many times can you make that joke? How many times will you say that before giving up, like 95% of all traders?

The worrying truth for all traders is that while the mistakes can be explained, it’s not exactly clear why it keeps happening. Taking a loss is tough. But not fully understanding why you continue to limit your profits and damage your own account is even tougher. It’s demoralizing.

This blog is less about numbers and more about feelings. The stuff we don’t (can’t) talk about. I could give 10 average traders the same profitable setup and indicators, yet 5 would take a loss, 3 would breakeven and 2 would actually profit.

I guarantee you there is something these traders are telling themselves – that we keep telling ourselves – that impedes profits. It has nothing to do with numbers and everything to do with our mental states, emotions and the way we relate to money.

Here are the thoughts, feelings, behaviors, and solutions to our trading mistakes.

FOMO

The Thought: Breaking Bad Habits Trading Psychology

“Things are looking good again. I think the market is ready to go up.”

The Feeling:

A few breakouts have already happened – you weren’t in them. People you know (mostly not) are making money, while you sit fiddling your thumbs. Charts are repairing themselves, buyers are stepping in, yet you wait. Wait for what? You’re scared. You’re going to miss everything.

The Behavior (Mistake): Breaking Bad Habits Trading Psychology

You scramble. You settle for “good enough.” You enter. And, you lose.

Solution: Breaking Bad Habits Trading Psychology

Slow down. Trading should never execute best guesses or opinions. It’s probability-based only. Remember, in market declines without confirmed follow-through days, 75% of stocks will continue to struggle and decline. If you haven’t put in the due-diligence ahead of time to identify and study a stock’s behavior, then it’s just part of the noise. Narrow your attention to your scans, your strategy, your risk management. Click here to read more about FOMO and learn 5 ways to get rid of it.

Boredom

The Thought: Breaking Bad Habits Trading Psychology

“That market looks tame enough. I’ll just try a small position in something.”

The Feeling:

I can’t take the waiting anymore. This is ridiculous. I’m supposed to be trading and making money, not sitting around like an idiot. I might as well be in a mutual fund. Oh wait… this stock looks like it could move up. Yes, let me open this. I’m going to give it a go.

The Behavior (Mistake): Breaking Bad Habits Trading Psychology

You break your fast waiting for the right setup. You enter. And, you lose.

Solution: Breaking Bad Habits Trading Psychology

If your strategy isn’t presenting a clear, coherent and favorable probability setup, you should not trade it. Period. The market is not a place to kill time with your money. The best places for that are called casinos, but at least the drinks are free there. If you can’t control your boredom, you frankly aren’t serious about becoming wealthy. Learn self-control.

Balance Depression

The Thought: Breaking Bad Habits Trading Psychology

My balances aren’t going anywhere. I’ll never be wealthy. I’ll never get to my goals.”

The Feeling:

I’m frustrated. I just suffered a drawdown and need to make it up to reach my financial goals. Or, I’ve been increasing my balance slowly, but at a snail pace. I need to do something to improve my balance. And fast.

The Behavior (Mistake): Breaking Bad Habits Trading Psychology

You over-size a trade, equating bigger sizes with faster progress. You chase a stock to participate in the nice gains. You buy a penny stock thinking this is your ticket to financial freedom. You enter. And eventually, you lose.

Solution: Breaking Bad Habits Trading Psychology

You’re upset your balance isn’t higher – that’s normal. In fact, that’s how everyone feels. The guy with only $25,000 wishes he had $100,000. The guy at $850,000 wants to hit his first million. The thirst will never be satisfied. But ironically, in our desire for more wealth, we force behaviors that are actually incongruent with wealth creation. And when a loss is taken, you will have to work twice as hard just to get back to where you started. Internalize your edge to the point where you know when to press the gas, and are perfectly “OK” with hitting the brakes.

People want to know: How do I make more money? Follow your rules. How do I make my balance grow faster? Follow your rules. How do I avoid drawdowns? Follow your rules.

Rules. Rules. Rules.

There are potentially endless strategies for making money. The one thing stopping you is you. The moment you’re ready to stick to objective rules and ignore your negative thinking patterns, you will arrive.

March 31, 2019

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