We are repeatedly what we do, Excellence, then is not an act, but a habit – Aristotle
To be successful in trading, it does not stem from having the best trading tools or the fastest internet connection.
Rather it boils down to the most basic fundamental, your trading habits. Most traders fail in trading not because of their inadequacy, but their negative trading habits.
Human beings are creatures of habit. It is no surprise that sometimes you are not aware of the negative habits that is affecting your trading, me included. Only through self reflection and feedback did I realize these 8 negative trading habits that held me back as a trader.
Once you overcome these 8 worst trading habits, you will be one step closer to profitable trading.
So what are they?
1) Failure to cut your losses
Taking small losses is part of the game. Taking large losses can take you out of the game
– Doug Kass
I am sure you have heard stories of traders making money consistently, only to lose them all in a short period of time. Why does this happen?
From a psychological perspective, human beings have a trait of wanting to be right. Thus it is no surprise that most traders would come into the trading arena with this very mindset.
By having the mindset of wanting to be right, you will hesitate in cutting your losses when a trade goes against you. Why? Because when you cut your losses you are admitting that the market is right and you are wrong, which creates an internet conflict.
So instead of cutting your losses, you will hope and pray that the market eventually goes back in your favor to prove you right. You may get it once, or twice but eventually the mother of all losses will hit you and leave you with an empty trading account.
It took me years of pain and frustration to learn that trading isn’t about being right. Rather it is about losing small when you are wrong and winning big when you are right.
2) Taking profits too early
You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits
– William Eckhardt
When I first started out in trading I was losing money consistently. It seemed that the market was always against me, whatever trades I put on would soon hit my stops.
This then lead me to develop a negative trading habit, taking my profits too early. Why?
Because I was so fearful of losing, I tend to quickly grab whatever profits was available. This would give me a sense of “aha, I am finally right” feeling. But looking at the big picture, I am still a consistent loser. And here’s why..
E.g. Out of 10 trades I lose 6 and win 4. The trades I lose cost me $600 and the trades I win make me $400. Netting it would still be a loss of $200.
If you try to understand this basic math, it shows that my profits are not sufficient to cover my losses because I was taking my profits too early.
This negative trading habit slowly ate into my trading account and led to a death by a thousand cuts.
Do not exit your trade just because you feel like it, rather exit only when the signal is met. This is to ensure that you ride your profits to compensate for the little losses that you will incur along the way.
3) Assuming the market is overbought or oversold
The market can remain irrational longer than you can remain solvent – John Maynard Keynes
I grew up in a middle income family, so we tend to watch what we spend. We buy items when it’s on sale instead of paying full price for it.
E.g. When doing groceries at the supermarket, my mom would usually buy fruits when it is on sale or look for other alternatives.
Thus the principle of buying value and selling dear has been instilled in me since young. But how does it relate to trading? A lot.
In my early days of trading, I wanted to buy low sell high adopting the similar principle that was taught since young. So whenever the market trades lower, I would assume that it is oversold and wait for price to pullback.
And as usual the pullback never came..
Because I assume the markets are oversold, I tend to miss big moves in the market. This negative trading habit has cost me a lot of opportunities and heart wrenching moments.
I would always remind myself that the market is never too high to long or too low to short.
4) Analysis paralysis
Trading the markets is fascinating if you ask me. Traders are provided access to a wide array of tools and strategies to select from. Unknowingly it is actually hurting them even more.
Like most traders starting out, I tried to learn every trading strategies I came across. From price action trading to indicators to harmonic patterns, I’ve tried it all. And because I trade many strategies at once, a typical scenario I encounter was having a bullish price action signal, but the indicators are telling me price is overbought.
I get a flood of information rushing to my brains causing me to hesitate to pull the trigger. Do I enter the trade or stay out? This made me confused as to what I should do. It became very hard to trade as there are conflicting signals from different trading strategies.
That’s when I decided to strip off the fat and focus on the meat. I abandon all other trading approaches that either wasn’t working or didn’t fit my personality. When I did that, I could analyze the market from a clearer and more objective perspective.
Nearly all successful traders I have known are one-trick ponies. They do one thing, and they do it very well – Steve Clark
5) Feeling emotional over your trades
Over my years of trading I notice a recurring pattern among new traders. They are usually the ones who will experience emotional highs and lows in their trading.
When price is going in their favor, you can see them cheering on for their trades as though their favorite football team is about to score a goal.
And if when price is going against them, you can see them moan and groan as though someone is poking them with needles.
Imagine you’re feeling pain when a trade goes against you and stop you out for a loss. How will you react to your next trading opportunity? Chances are you will hesitate to take it as you just encountered pain on your previous trade.
Or perhaps you just scored a 4R trade and you’re feeling like a champion, how will you react later? You probably think making money is easy and start to be trigger happy, entering trades that are not part of your trading plan. You know what happens next..
The issue with these emotional highs and lows is that it could cloud your judgement on the next trade.
However the good news is that if you survive trading during the initial years, you will realize that trading is playing out your edge through the law of large numbers and not on a single trade.
Thus there is no need to feel emotional over any trades because it doesn’t mean a thing.
6) Micro managing your trades
You could enter a trade on the 1 hour, 4 hour or even daily and there is nothing wrong with the entry time frame you choose. However what is wrong is going down lower than your entry time frame to micro manage your trade.
This would lead you to make emotional decision that will hurt your trading. Let’s say you are currently short Eurusd on this 4 hour chart when price retested the 20 EMA and, your stops are above the 50 EMA.
On the next candle, you notice price formed a bearish engulfing candle in your favor. Your adrenaline is now pumping because the trade is going the way you had planned.
Next you get a bullish hammer that is trading against you. Dang! Your stomach starts feeling a little queasy as your profits are diminishing bit by bit. You start wondering if you should take profits in case price goes further against you.
You start looking for clues and look down into the 15 mins chart for a ‘clearer’ picture. Then you notice price forming higher highs and lows against your entry. You tell yourself that means a possible change in trend and you had better take whatever profits you have currently available.
You feel relieved after managing to take some profits out of the trade, protecting yourself against any losses. A few days later you looked at the chart and realize that if you follow your original plan, you would have made another 600 pips. And that’s when keyboard and mouse starts flying.
So how should you manage the trade?
You should always manage the trade on the entry time frame, in this scenario it is the 4 hour chart. Because this is where your entry signal is given, and your stops decided based on the price movement of the entry time frame.
7) Finding excuses to place a trade
If you are a discretionary trader, then the only way to consistent profitability is to have a trading plan. Your trading plan is critical to your success as it gives you clear rules on how to engage the markets. From entry, position sizing and exits, your trading plan must cover them all.
However when you are placing trades that is not dictated by your trading plan, then you are finding an excuse to place a trade. Let me be an example here.
You know I am a trend follower and will only trade when the markets are trending. If I were to place a trade just because price is at resistance and stochastic is oversold, then I am finding an excuse to place a trade.
What’s wrong with finding an excuse to place a trade?
First your trading becomes a mess because you are constantly trading the markets for different reasons. This makes it impossible to tell which are the profitable trading setups you should focus on. Second, finding reasons to trade eventually leads to over trading. When you are over trading, you become emotional and lose objectivity of the markets.
If you read How I Lost 50% Of My Capital Before Turning Into A Profitable Trader, you will realize that I used to find all sorts of reasons to place a trade. I was trading price action, harmonic patterns and trend following setups. What I got in return was confusion, emotional drain and a negative equity curve from all these setups I’m taking.
The day I to stay true to one trading approach was the day I felt liberated. I highly encourage you to find what is working and stick to it. Do not find excuses to place more trades as it will do you more harm than good to your trading.
8) Blaming yourself over a good trade
A good trade is a trade which you followed your trading plan regardless of whether it made or lose you money. We are looking at the next 1000 trades and if you are placing good trades after next, your edge will play out over the long run.
Imagine you entered a trade and it starts going in your favor immediately. Then you trail your stops according to your trading plan, to protect your profits. You start feeling good about it, after all you have some money in the bank! Slowly you notice price starts reversing towards your entry and your trailing stop is hit.
And when you thought the emotional roller coaster is over, price starts going back in your favor and your world crumble. This is when the little voice in your head starts saying “ahh how stupid I am, if I am more patient I could have made another 300 pips!” Sounds familiar?
Do understand that it is not possible to consistently predict where the markets will go. Likewise it is not possible to consistently exit the market at the exact highs or lows. So do not blame yourself when you have done a good trade, only to watch it go further in your favor. And like what Mike Bellafiore constantly remind his traders, one good trade and One Good Trade.
Conclusion
Trading is just like any competitive sport. It is the little habits of a champion that defines the champion. Likewise in trading, it is the little habits added together that separates the winners from the losers.
If you have negative trading habits, start to work on it one by one as it will pay off dividends in the long run. After all, Rome wasn’t build in a day and successful traders are not born overnight.
So, which negative trading habits do you find yourself doing?
(Thanks to Rayner)
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