Sunday, May 28, 2017

Creating good trading habits

Being successful as a trader over the long-term involves being consistent in your approach. This means creating a pattern of good habits that you can repeat.

Losing traders may be using an approach that has a positive expectancy, but they are not getting the results that they should - this can be down to poor execution, poor preparation, or making emotional, irrational decisions, as well as other factors.

I refer to these issues as an 'expectancy gap'.

I know of traders who religiously keep track of this - one such trader I know went as far as tracking two sets of results - one with his actual trades, the other showing the performance had he fully followed his rules in the same trades. This can be a sobering exercise!

It is been researched and proven in fields that you are able to cultivate and repeat a series of habits over a period of time, then you will be able to continue to repeat those habits over the long-term.

Here is James Clear's article on the subject.

The point is, to truly change a habit will take different people different lengths of time, and will depend on the complexity of the changes, together with the willingness and desire to put the necessary practice in.

You may recall that I wrote several months ago about a day trader who needed to make changes to his habits (the article is here). Well, he is still faithfully recording his results, along with keeping track of how faithful he is to his process (such as recording the 'paper chain' of O's marked in his trade journal).

It is now second nature to him, but he enjoys the process of sticking to his trading process - because he can see the results in the form of his account growing over time.

He has formed new habits!

Some people try and create new habits, but they stick to them intermittently at best. Normally a setback in their trading results reinforces the need to stick to their changed routine. The habit hasn't taken hold yet. But if they stick to it and resolve to become more disciplined in their approach, they can get there.

So much time in trading successfully revolves around the processes surrounding trading, rather than the actual act of trading itself. How long does it take to press a button to buy or sell? It is the recording of the trades, the review process, further research, and putting the time in on improving their method, their risk management or their mindset which is where the hours are clocked up.

A lot of people are simply not prepared to put that time and effort in. They'd rather just wade into the markets and fritter away their trading account without formulating a clear, disciplined trading plan, and without trying to develop the necessary habits to succeed.

The traders I have observed who have progressed the most in cultivating new habits have also been the most disciplined and faithful in recording how well they stick to the habits they are trying to develop.

This can easily be done either by creating a series of questions on a spreadsheet and keeping a tabular record of the results. Some people I know use mobile phone apps such as Loop Habit Tracker or HabitBull to help them record their progress in sticking to the habits they are attempting to develop and become second nature.

Below are examples of habit questions - some of these may only be relevant to certain styles of trading, but you can have fun creating your own list, which can also relevant to your own strengths or weaknesses as a trader, as well as your basic style or timeframe:

  • Am I prepared to trade? 
  • Have I cleared my mind or meditated prior to trading? 
  • Have I reviewed my market feeds for any overnight news? 
  • Have I run my stock selection scans? 
  • Have I updated my watchlists? 
  • Have I checked for any major economic releases due in today's session, and if so at what time? 
  • Have I checked when the next earnings reports are due for the stocks I am interested in trading? 
  • Have I updated my risk per trade calculations, along with 2ATR measurements and position sizes? 
After market close 
  • Have I carried out my daily review of my trading? 
  • Have I updated my stops as per my rules? 
  • Have I logged my results? 
  • Did I only make logical, rational decisions throughout the market session? 
Obviously, any questions that are repeatedly marked with a 'No' or an 'X' over a period of time will clearly highlight what you need to work on.

Finally, note how these questions make no reference to whether you made a profit or a loss. You can break every trading rule on a given day and make money. You can also trade perfectly on a given day in accordance with your rules and lose money.

The thing is, the more faithful you are to your process, you increase the probabilities of being successful over the long-term. Creating good habits will help you achieve this.

What we are focusing on here is becoming consistent in your approach and how you execute it. If you are able to repeat your process that has an inherent positive expectancy, then you will make money.

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