How To Identify And Break Trading Habits

Whether you are an established day trader on the stock market or relatively new to investment but have shown promise on test accounts, there is a good chance that you have already established and developed not only a specific set of skills but a specific set of habits as well.

These habits can vary from person to person but they often revolve around establishing your forex funding trading plan, what will make you adjust it and what will make you outright break it.

Financial markets rarely stay still and particularly in the 2020s, there are a lot of factors that can affect the exchange rates between different currencies, in particular, which can sometimes hamper a carefully planned trading strategy.

If you are successful enough to receive funded accounts for forex trading, you will have established yourself as someone who can navigate the market well and can make successful, profitable trades.

What some tests will also look for is signs of potential bad habits that would harm a long-term trading strategy, even if it leads to great success in the short term.

Here are some tactics and techniques to spot trading habits and stop them before they can hamper your strategy and long-term prospects.

Remember The Ultimate Goal

Business achievement goal and objective target concept

It can be easy at times, particularly for new traders to focus solely on the trades in the moment. 

Every successfully exercised trade on a currency is a success and every loss is a failure. This is not the way to think about trading in the long term and can lose you everything.

Success and failure are not necessarily dictated by profits and losses, however counterproductive that may sound, but by whether you followed your plan and executed a trade with discipline, with care and based on a sound trading strategy and plan.

The difference between a skilled trader and a gambler is discipline. You can make a lot of money 

by betting your whole account on risky trades in the same way you theoretically can win the lottery, but most of the time you will not, and in the long term you will lose a lot more money this way.

Conversely, if you execute a carefully planned trade that does not pan out as expected because of a black swan event or acute shifts in the market that you could not predict, control or expect and you make a minor loss, that is a successful trade because you kept your nerve.

Good trading plans assume that you will not hit the back of the net with a trade every single time and ultimately what matters is not whether you made money right now, but whether you are on target to meet your financial goals over the medium term.

Beware Of Risky Shorting Forex

Most trades that people make, especially in forex, are long trades in the sense that you buy a currency pair with the expectation that the former currency in a particular pair will rise relative to the other, but there is another, far riskier way to trade forex that has emerged in recent years.

Short-selling, or simply shorting, is a trading tactic wherein you borrow a currency pair from a broker and sell it in the market, buying back the currency to give back to the broker later.

You can make money from it if, for example, major financial circumstances cause one currency 

to plummet relative to the other in the pair. You buy it at a lower price, give it to the broker and pocket the difference.

However, there is one fatal flaw with short-selling that makes it an exceptionally dangerous and risky trade to make, which is based on market trajectory.

With long trades in the financial market, you already have the currency pair so if you get a major and unexpected fiscal event, the most money you can lose is all of your account.

This is bad, it is better than theoretically losing infinite money, at least until your broker makes a margin call and forces you to close your position and suffer a significant loss.

It is unlikely that any such trade would ever be made in forex, but it highlights that you should never take a risk you do not understand and never invest what you cannot afford to lose.

Know When To Cut Your Losses 

Trading, investing in cryptocurrency and stocks using mobile app concept.

There was a stock market trader who was endorsed by Jim Cramer who claimed to have only closed a losing trade once in over 400 stock picks. This looks impressive at first glance but highlights how important looking at the overall picture of a person’s portfolio is.

His monumentally stupid strategy, the opposite of what any sensible trader should do, was to buy a stock and hold it until it makes a small gain because that makes it a “winning” trade.

Obviously, if the trade never reached the price he paid, he would hold on to it forever, which technically does not count as a loss.

This story is somewhat instructive as it highlights the importance of knowing when it is time to give up on a position and take a small loss rather than hold on hoping for better days.

It is bad not only in the most likely scenario that it never makes money, but also if it succeeds, as a bad trade that makes money only reinforces the habits and behaviours that caused it to happen.

Whilst patience, resilience and perseverance are all virtues in forex trading, relying on good fortune to bail you out of a bad position rather than a stop-loss order or a robust trading plan are trading vices that one should attempt to unlearn and break.

Reward Good Trading Behaviour, Not Profit

Being a great trader is not inherently about making a lot of money, but instead is about making money in the long term, and many of the habits and behaviours that will help you succeed across your career will help you in nearly any other role.

Working hard, being willing to learn from successes and mistakes, keeping a cool head in a time of crisis, avoiding unnecessary risk and always wanting to build up your skills and knowledge to become a better and more versatile trader.

These behaviours as shown through disciplined trades, taking on courses and reading up on the wider market, should be rewarded, and you should be highly critical of trades that were overly risky and reliant on luck, even if they were ultimately successful.

As well as this, trading too frequently outside of your trading plan, being easily spooked into closing your position or falling prey to greed with it comes to managing your profit, as well as chasing trends can lead to ultimate failure in the long run.

Understand The Rule Of Luck

Lucky Man using laptop outdoors

Over a stretch of time, the effects of luck, both good and bad, will typically average out and give way to patterns of profits and losses that can be analysed and managed.

Any robust enough trading plan will factor in the potential for both good and bad luck to strike, as 

whilst you can have people who have a lucky or unlucky streak, on average people with the best trading strategy will make more money overall.

Be Mindful Of Random Reinforcement

This article has mentioned a few times the dangers of a fortunate profit and the virtue of a disciplined loss, and the reason for this is that one of the biggest differences between long-term success and failure in trading is the response to random reinforcement.

To explain why it is so harmful, we need to explain psychological reinforcement. According to theories of reinforcement, people, as well as animals, learn a system of ethics and decision-making initially by which behaviours are rewarded and which are punished.

Whilst most people have an ethical system that is more complex than how they will directly benefit from a decision, in an unfamiliar situation where we are uncertain of what is going on, we tend to return to relying on praise and blame or a binary sense of success and failure.

If we make money, we are successful, but if we lose it, we are failures, and the latter hurts far more than the former makes us feel good. It makes us question if our strategy that worked so well in demos is right, and even if we should trade at all.

The problem is that whilst the market does have patterns that can be predicted, it is also constantly shifting and relies on factors that are well out of the control of any trader. 

This is known as random reinforcement, and it is something that every trader faces and must react in opposition to in order to take that next step in their trading career.

Focus On What Is In Your Control

The best way to break any bad habits, as well as help recover after suffering an unfortunate streak of losses, is to focus only on the factors within your control.

Evaluate your strategy, your equity curve, your stop-loss limits and your risk/reward ratios, and see if there was anything you could or should have done differently. If not, then your trade was successfully followed even if your balance sheet disagrees.

As well as this, if you are cautious about your losses, then even with a losing streak you can make it back with a good trade or two.

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