How To Break Bad Trading Habits

Do Investors Really Need a Trading Plan

Planning is said to be the most important of all management functions. One of many planning definitions states a plan specifies what is to be done, when is it to be done, how it is to be done, and who is going to do it. Planning is forward looking, created for an event or series of events before they happen.

Planning extends beyond the business world, with people in all walks of life making plans for a vacation, plans for buying a home, and plans for retirement. Without planning for investing, how does the investor make the decision on what to buy, when to buy, how much to invest, and when to sell?

The Importance of a Trading Plan

Investors without a plan answering the critical what, when, and how much questions is akin to a plane without a flight plan. For far too many investors the end result is impulse buying with a “follow the herd” mentality. Impulse buying is one of many bad habits investors without a plan develop, including injecting emotions into the process, following the herd, and panic selling.

Investor A checks the market action one morning and sees a stock with which he has little familiarity or none at all exploding. After a quick look at a price movement chart for the stock, the investor jumps in, investing whatever dollar amount that seems reasonably affordable at the time.

This kind of impulse buying often ends up in impulse selling in a panic as the investor sees the stock price collapsing as the herd rushes for the exit doors.

Many market experts and commentators point to impulse buying as one of the critical mistakes made by newcomers to share market investing.

There is no such thing as a “one size fits all” trading plan. Investors cannot “cut and paste” a trading plan from the internet that will fit their needs.

Trading plans begin with a clear description of what the investor wants to accomplish by investing in stocks –.the goals and objectives. The answer varies by individual, but all remaining steps in developing a trading plan are grounded in that statement of goals and objectives.

Assessing risk tolerance, adopting a trading approach, and developing trading  strategies all should be tailored to what the investor wants to accomplish by investing in the stock market.

Taking the time to thoroughly research the “rules of the game” provides essential guidance on strategic decisions such as when to enter and exit a trade with defined profit levels. Risk management strategies include stop-loss and trailing stop-loss orders and keeping a journal documenting each trade.

Some adages about planning ring true – failing to plan is planning to fail and plan your work and work your plan.

Defining Success

Common sense would suggest that the definition of success in trading is making money. Long term, certainly, but serious investors need to rethink the assumption that a successful trade is one ending with selling for more than the buy in price.

With a trading plan in place, success should be redefined as following the plan.

Good Habits Every Trader Needs

The Merriam Webster Dictionary defines habit as “a settled tendency or habitual behavior.”

Habits can have positive impact or negative impact.

The first positive or good habit for investors to ingrain in their time investing is reviewing relevant aspects of the plan before taking action. Creating a plan and then ignoring it is a bad habit.

There are many other positive habits of successful traders to adopt.

Some planners habitually create plans with lofty expectations that may be unobtainable. Setting realistic expectations in your trading plan is a habit, testing each step with the question how realistic is this for me.

Discipline in trading is a good habit, as it is in all walks of life. The world is filled with desk drawers stacked with plans that are not being worked. Investors taking a day off to check the market action may get their blood pumping watching the market leaders of the day, itching to jump in even while their trading plan is pinned to a bulletin board near the compute. Discipline is what will keep that investor from impulse buying.

Self-Awareness is the positive side of self-deception, a habit with strong negative impact. Skipping some criteria for what you need to know about a stock before investing can become habitual, especially for investors who “fall in love” with a particular stock. Self-awareness is being honest with yourself to admit you are not following the plan.

Working the plan is a positive habit that may take time to develop for investors who file plans in that desk drawer and ignore them. A good trading plan should guide your investment decision making process. Reviewing the plan before making a trade develops a habitual work the plan mentality.

Review the trading journal on a scheduled basis is another beneficial habit. The point of keeping a trading journal is learning. Record keeping is available on online trading platforms, but a trading journal could record details of the steps taken to make the trade, something to review periodically and learn from.

Patience is a virtue throughout life and stock investing is no exception. Waiting for the right moment to enter or exit a trade following guidelines spelled out in the trading plan requires patience.

Resilience in the face of trading losses is a habit that may take time to develop. Investors need to be able to bounce back from adversity.

Educating yourself on a continuing basis is a habit necessary to develop in rapidly changing market conditions. Approaching learning as a life long habit has a positive impact on investors both in the short and long terms.

Reinforcing Good Trading Habits

As a rule, humans crave recognition for a job well done. Most investors engage in market trading on their own, without a superior or a peer to provide some form of recognition for accomplishments.

Self-rewarding means as little as a smile and a silent “good job” or as much as a dinner at a favored restaurant. Depending on individual wants and needs, there are multiple opportunities for rewarding trading success.

Rewards and punishment may apply to situations in life, but not to investing. Rewards are positive reinforcement. Punishment is self-defeating for investors.

Investors need a trading plan to guide their investing decision making. Trading plans reflect the unique characteristics of the individual investor creating the plan, starting with a statement of what the investor seeks to accomplish by trading stocks.

The plan should follow the entire chain of invents in the process of stock market investing, beginning with the standards for researching potential stocks to the parameters for exiting a trade.