Breaking the Habit in Trading

Sunday, June 8, 2014

What are some of the common trading errors that we all seem to have had, or for some of us, are still having? Where do errors come from? How do they occur? Well, we all have habits, and habits tend to occur because of repetition. Think about anything you do in life. Most of the time it's a result of conditioning yourself through repetition. Have you ever set your alarm clock for a particular time to wake up, only to find yourself waking up without the alarm clock a few weeks later? I know it's happened to me! Then you look over and it's about 5 minutes before your alarm is supposed to go off and you say... "just... 5... more... minutes" Why do you think that happens? It's because you've conditioned your mind and body to wake up at a certain time, and then you become accustomed to doing it because of the repetition.

Repetition has the same effect in trading. For example, if you begin to take impulse trades, or make decisions that are outside your trading model, then what you're doing is beginning a new pattern of behavior. The problem with starting a new pattern of behavior is that first off, you haven't even tested this new behavior to see if it's profitable, and second, you are now introducing a new action into your trading career which can severely alter your thoughts and emotions in trading. Now you could say "yeah, but I made money"...the WORST thing that can happen. Why's that? Because you just made money by breaking your rules and then you may start to think that you are smarter than the system, and then you do it over and over and over again with no testing whatsoever only to find yourself saying "If I had just followed my rules from the beginning, I wouldn't be in this mess"

When you conflict your subconscious and conscious mind with different trading habits, it's only going to make your trading career that more difficult. Now, that's not to say that you can't have two different types of trading models as a trader. You absolutely can and still be an effective trader. However, what's important is that you develop the unconscious competence level. In other words, it's important that you master one method of trading before introducing a secondary method so that there is no conflicting information.

Now, what can we do if we've introduced bad habits into our trading? How can we break those patterns of behavior? There are many ways of course, but here are some of the more effective ways that I believe really work. Studies show that it takes eighteen to thirty days to break a habit and then another eighteen to thirty days to introduce a new one. So what we're going to do here is introduce a few simple techniques that can help change your thought pattern in trading. Before we go on, let me state that if you are trading and do not have any of the habits described above, these techniques are still a great exercise for you.

This is what you are going to need:

* Notebook or a writing journal
* Either 3×5 index cards, or even better the jumbo index cards
* Sharpie or a dark marker
* Pen

Once you have these items, we're going to do a few exercises:

1. In your first page of your journal or notebook, write at the very top in BIG LETTERS, "WHY DO I TRADE?". Once you've done that, I want you to list a few reasons why you trade. Take the time to REALLY think about it. Is it the money? No...It's what the money represents to you. Maybe it's time freedom. Maybe it's so you can give back. It could be many things. However, before you list the reasons why you trade, the very first reason should be: I TRADE TO BE CONSISTENTLY PROFITABLE. Feel free to write as many reasons why you trade. If it takes a few hours, GREAT. If it takes you 10 minutes, that's fine too. Just list down all the reasons you trade.

2. Once you've done that, on a fresh new page write the following:
I trade what I SEE, not what I think.
I cannot control the market, I can only control MYSELF.
My trading mindset is the key to being SUCCESSFUL.
I will not be biased as where the market is going.
I BELIEVE the markets are 100% psychological.
I strictly adhere to my RULES.
Losing is a part of the business.
Trading is a business and I am here to PROFIT.

* I trade what I SEE, not what I think.
* I cannot control the market, I can only control MYSELF.
* My trading mindset is the key to being SUCCESSFUL.
* I will not be biased as where the market is going.
* I BELIEVE the markets are 100% psychological.
* I strictly adhere to my RULES.
* Losing is a part of the business.
* Trading is a business and I am here to PROFIT.

Take a minute to re-read what your wrote and understand the meaning of each statement.

Now, after you've done that, I want you to memorize the words in BOLD.


Or you can abbreviate using the first letter of each word: S.M.S.B.R.P.

Take the above statement or abbreviation and write it down with your marker on your 3×5 or Jumbo index cards. After you've done that, tape it to the bottom of your monitor. We're doing this because seeing and reading this statement with REPETITION is going to change the pattern of your conscious and subconscious mind when you think about trading. When you train yourself by looking and listening to yourself repeat the statement SEE MYSELF SUCCESSFUL, BELIEVE RULES PROFIT or S.M.S.B.R.P. over and over you WILL BELIEVE and OWN (I'd use a different word) these statements.

Think about words and phrases you've learned throughout your life. Something as simple as "The wheels on the bus go..." I'm sure most of you knew to say "round and round" Or if I say "Mary had a little..." Again, for most of you I'm sure the word "lamb" came to mind.

Can you remember a time when you or a friend got something, and immediately you began to notice other people with the same thing? I remember a friend of mine bought a very unique Volkswagen a while ago that I had never seen before. It was actually a pretty rare car that was made from 1988-1993 in the US, and it was nice. After seeing it, driving it, touching it, I began to notice when I saw other ones on the road. I would be driving and sometimes I would see one far in the distance and I would speed up and think it was so cool that someone else had the same unique car that my friend had. Then I would frantically call him and say "Guess what?!, I just saw someone with the same car as you!" How come this happened? It's because seeing his car almost everyday, driving it, washing it, OVER AND OVER made a connection in my conscious and subconscious mind, and with that mental representation now there, it became much easier to notice the same unique car in different parts of the area. It's been over 7 years now, and I still can notice that car from a distance.

What this exercise is meant to do is create a new pattern and help you break any bad patterns or habits you may have in trading. Take the time everyday and read WHY DO I TRADE? Then take the time to read the second set of statements. As you read them think about how it applies to your trading. Think about the perfect setup that you saw on a chart and when it worked exactly as you expected. Think about how you took that trade without any hesitation. Look at the index card with your statement S.M.S.B.R.P. and re-read it OVER and OVER again. Then think about how your trading career will be profitable as long as you follow your rules and do exactly what you are supposed to do every single time. Again, I am assuming that you have back-tested and you have a PLAN. Remember, everything we do is a result of repetition and conditioning. Now think about how you can condition yourself to succeed as a trader and BREAK those bad habits!

Now you may be wondering, what are you going to do with the rest of your journal. What I want you to do is begin to make daily entries. It can even be a checkbox if you want. But each day that you follow your rules, write it down, and write down how it FEELS, regardless a profitable or a non-profitable day. Remember, that losing trades is a part of the business, and it WILL happen, but what is most important is that you follow your rules. A profitable plan and a set of rules will in fact prevail.