How to Break Bad Trading Habits

Success as a trader means being consistently profitable over the long term, and that requires developing a good trading plan and, most importantly, sticking to it. One of the most destructive habits a trader can have is ignoring the rules of their own trading plan about when to enter and exit a trade. Breaking this bad habit means critically examining how you view the success or failure of any single trade.

Key Takeaways

  • Success as a trader requires developing a profitable trading plan and sticking to it over time.
  • Ignoring their own trading rules is one of the most destructive habits a trader can have.
  • It is vital that a trader view the success or failure of each individual trade according to whether they followed their trading rules—not whether the trade resulted in a profit or loss.

Redefining Success and Failure in Trading

To break bad trading habits, it is vital that traders judge the success or failure of each trade on whether they stick to their trading plan—not whether the trade resulted in a profit or a loss. If you make an undisciplined trade, one not dictated by your plan, you must view that as a failed trade. You can't reinforce poor discipline by congratulating yourself.

On the other hand, if you execute your trade according to plan but still lose money, you must view that as a successful trade because you followed your plan. Every good trading plan accounts for losing trades. If you beat yourself up over a losing trade that was made according to plan, you will be much less likely to follow that plan in the future. That will result in impulsive trading that can wipe out trading accounts over time.

Example of a Bad Trade That Makes Money

One of the most common bad habits that can lead to disaster is holding onto a money-losing trade once it moves well beyond your stop-loss level in the hopes that it will turn around—and then seeing it turn around and generate a profit. The profit itself reinforces the bad habit.

But it's even worse if you congratulate yourself for holding on until the trade turned around. Coming out with a profit on a trade like this is almost always a result of luck. And luck always runs out, usually with disastrous results if stop-loss levels are ignored.

Using Rewards to Create Good Trading Habits

The first step to redefining success and failure on individual trades is to change your internal dialog. Traders should praise themselves when they follow their plans, whether the trade was profitable or not, and they should acknowledge failure when they don't. They might even grant themselves some small reward for following their trading plan during a losing trade or withhold one for deviating from the plan.

Breaking your trading rules is a recipe for disaster over the long run.

Adjusting Your Trading Plan

The first step to becoming a successful trader is making sure your plan is a profitable one. Yet market conditions change over time, and a trading plan that is profitable one year may not work as well the next. So if you start losing money consistently while following your trading rules religiously, you can always go back and re-examine and adjust your trading plan.

Frequently Asked Questions

What does it mean to be successful at trading?

Being a great trader means being consistent over the long-run. This means being diligent, learning from your mistakes, and keeping emotions in check. Stay within your risk tolerance and if you don't know something, learn about it.

How can people be unsuccessful trading?

Trading too often, being swayed by fear and greed, herding behavior, and trend chasing can all lead to failure.

Is luck important?

Luck, whether good or bad, is always a factor - but over time, the effects of luck will wash out and patterns of success or failure will emerge.

The Bottom Line

Still, the fact remains that no trading plan will work if it's not followed. So in the short term, you should define success and failure according to how disciplined you are. Always stick to the plan, and don't deceive yourself into thinking you made a successful trade when you only got lucky.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.