A habit can be explained as a behavior or routine that is repeated multiple times and happens unconsciously.
Researchers estimate that about 40% of the decisions that we make on a day-to-day basis are based on habit. If this is the case, then the outcomes of our lives are a sum of our practices.
Trading habits play a vital role in success or failure. Great traders have developed good trading habits.
In this lesson, we are going to answer two primary questions;
In the book “Power of Habit,” Charles does a perfect job of showing how a habit is formed.
We can simplify that process in the following way:
Every habit has a trigger. The trigger is the feeling of unease or anxiety that usually crops up just before performing a routine. It can be a prior action, time of day, location, or anything that triggers the habitual behavior. This could be anything that one’s mind associates with that habit and automatically lets a pattern come to the surface.
In trading, we can use revenge trading as an example. The trigger point of revenge trading is losing money. After a losing trade, a trader hooked to revenge trading may feel the urge to execute another position.
A routine is a habit or behavior that we have formed. It’s usually anchored to the trigger of the pattern. In most cases, habits are formed unconsciously.
Rewards usually come in the form of dopamine releases in the brain. It’s generally associated with a positive feeling. In some rare scenarios, a habit can cause either pain or pleasure. In such cases, there is a risk of addiction. Trading happens to be one of those environments.
If we can understand this three-step process, it can be easier for us to know how to cultivate good habits and break bad habits.
In our trading, most decisions are made out of habit. For example, most inconsistent traders don’t have a structured routine of trading profitably. Consistency of outcome requires consistency of process.
Addiction happens when we cannot stop using a substance or engage in a behavior even though it is causing psychological and physical harm.
Trading addictions are common due to the pain or pleasure effect we talked about earlier. Since we can’t tell whether pain or pleasure will follow at the execution point, many traders fall prey to random performances to pursue these rewards.
Forex traders often spend every ounce of their energy trying to access opportunities where there is none. In the markets, there is a time to buy, sell, and stay out. Most of the time, traders should be out of the market, not clicking either buy or sell.
However, traders will keep on clicking the buy and sell button to ensure they get the thrill from trading, which is highly addictive.
Part of the game of trading is learning how to deal with your emotions. Self-awareness is critical in the management of emotions. Traders need to learn how to manage themselves to ensure they don’t succumb to addictive trading. Losses are part of the game. Learning how to deal with them will be crucial in ensuring you don’t end up with emotional trading.
New traders often assume that more screen time equates to higher levels of productivity. It takes one some deep losses financially and emotionally to understand that less is more. Scheduling screen time during the day to watch what the markets are doing is one of the precious traits of a trader. This will help you focus on the signal rather than the noise in the markets.
We are going to go through some of the most dangerous habits a trader can develop. Unfortunately, human nature will draw you to these harmful habits. This is because our brains are wired for comfort, and often what feels comfortable is wrong in the markets.
Since habits contribute almost forty percent to our success, it’s worth the effort to develop good habits. I will start by listing some of the most valuable trading habits to share the formula we use to build these habits.