Trading Psychology: Cracking down on your bad habits
Breaking the habit
Through these steps you’ll figure out what’s derailing you and how to turn it around.
Habit loop consists of
For instance I crave chocolate that’s my cue
I get a snickers bar from the cupboard that’s my routine
I eat it and enjoy the sweetness that’s my reward.
Trading related example : ‘I want to make, money, so I take a position to try and fill the need of generating money’.
Making money is my cue
Taking a position my routine
My Reward is filling the need of generating money
Now the process is to identify these 3 components for you.
To some of you it might come instantly for others it takes a bit of digging. So how do you dig?
First question you want to ask yourself is what is it that you want to change about your trading the most? What’s truly bugging you? Whatever the answer is that would be your routine. Because it’s something that you routinely do and kicks your bad habit into gear.Now we need to find the cue for it. Lets assume you identified revenge trading as your routine.
I throw a couple of ideas in
But only you know better
Are you revenge trading because
You get bored?
You feel useless?
You are lazy?
You are greedy?
It could be a mix of a few or other things that come to your mind. Assume it is feeling unsuccessful and greedy.
Let’s put this into context;
Your revenge trading kicks in because of your greed and feel of failure.
What’s the reward for you?
Why do you revenge trade(routine)
What are you looking to achieve. In our earlier example the routine was eating chocolate. The reward was the taste of a sweet and crunchy bar. You revenge trade, as a result of doing so you feel….
Again it could be a mix of emotions, it might take a while to understand what drives you. Let’s assume it is success and stress relief. To recap:
In this assumption we established the root cause of revenge trading is greed and being unsuccessful probably on the back of failing/missing trades. You do it for the sense of achievement and relief.
You probably have discovered the single thing that could change your trading around forever. You discovered your destructive habit. Every time your cue shows up, at the slightest hint of feeling greedy or unsuccessful you are seconds away from blowing a hole in your account. Think of yourself like a scientist and see how you can distract your cue and break the habit loop. You can’t stop feeling unsuccessful but you can break he habit that’s causing you to lose . For me for instance fear of missing out was and still sometimes is a cue to kick my routine into play which is placing trades based on no real plan to feed my need of taking action. However now I know every time I feel like I’m loosing out, I’m minutes away from screwing up. So when my cue shows up,
I take quick action to prevent my habit loop from connecting. It could be as easy as watching a YouTube, talking to a friend or whatever works for you. It’s amazing how much sanity and money I save.
We identified the habit loop.
Which is made out of cue-routine-reward
Whenever my cue showed up I distracted myself so my habit loop doesn’t connect,that’s very important. Now that I’m confident and fully understand what drives my behavior, it is time to isolate my cue and have a plan. We aim to plan ahead of our cues by finding the pattern that leads to it. Science has shown that cue patterns come down to:
For example everytime my cue showed up my notes went like this:
-Where was I? At home
-What time of the day was it? 9:30am
-How did I feel? Deflated
-Who was around me? Kids
-What did I do? Had a snack
-Was in bed
After a while it became clear that my cue shows up mostly in the morning. Now I was able to change to a better routine by planning for my cue and choosing a behaviour that delivers the reward I was craving for (which was being consistent and making more money). So I would wake up every morning 6am do my research and have a trading plan for the day. That led to increased confidence in trading, no more impulse trading, much more consistent results and better sleep at night. Changing one bad habit into a good one will ripple through your entire trading career.
You’ll go through the same process, and find your cue pattern. Once you are able to forecast your cue showing up you can plan for it to get the desired result you crave. At first you might not stick to it. But every day you follow your plan you’ll feel better. Changing habits can be difficult and can take a long time. But once you understand how a habit operates, once you diagnose the cue, the routine and the reward, you are going to have power over it.