How to break bad trading habits

One of the things that sets the best traders apart is their ability to break bad trading habits. For someone who is still new to trading or in the middle of an unsuccessful period, this becomes even more difficult to master. So how can you break your bad habits and become a better trader? Here are five ways to start today.

1 Understand yourself and your need to change – while sometimes it isn’t easy to evaluate ourselves and our perceived weaknesses, the benefit is that we can only continue to better ourselves if we do. Human tendency reverts to a defensive nature, shielding us from criticism. Removing that veil however, allows us to identify the first things we should address and how to do so in order to achieve the best results while trading.

2 Recognize the benefits of change – if you can understand how you will benefit from changing your bad habits, you stand to embrace the changes and become a better trader as a result. This might be habits like: a short patience level; making trades without researching; putting yourself under pressure; working in a distracting environment; and so forth. If for example you can approach trades with a greater level of focus and calmness, imagine how your trades would benefit from such changes.

3 Determine your trigger for self destructive habits – evaluate what it is, whether internal or external, that triggers your self destructive habits. Once you understand what drives these habits, you need to establish a manner in which you can pick up on them while you’re trading, and before they can interfere. With this noted, determine what is the appropriate way you will be able to mitigate these factors from causing your negative habits.

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4 Develop a new positive habit – once you have the context surrounding the triggers that prompt your negative habits, it’s time to follow through with change by creating new habits. One such example is if you’re someone who averages down while holding a sinking stock, or is reluctant to close out your losses, thinking the stock is misunderstood by the market – it could be a sign that you’re emotionally attached to the stock, a self destructive habit causing anxiety. Write a plan that you can methodically follow so that every time you enter a trade you have a stop loss, or that reminds you not to catch a ‘falling knife’.

5 Practice until the new habit becomes the habit – like everything else in life, you need to practice something until it becomes engrained within you. Put yourself in the mindset that if a situation arises that would normally trigger your bad habit(s), how are you going to react? Look at some of the trades you’re holding, and picture a change in events (e.g. the stock falls 25%). Implement your new positive habits by systematically going through the appropriate response, and continue to do so until it becomes your instinctive reaction.