“The right trading behaviors start as rules and evolve into habits.” – Brett Steenbarger
Across sports, business, and entertainers the top performers are not the ones that have to think through their every action. The top performers have trained themselves to react at the right time and do the right thing in each situation. Champions have trained themselves to react in the heat of a game, concert, or competition and does what is needed without having to take out a handbook, ask for advice, or look up an answer. Their practice and training have taught their mind and body what to do in the pressure of the moment.
When a champion is learning proper technique at first it is a very mechanical and thoughtful process. Do ‘A’, then ‘B’ and you will likely get ‘C’. Speed in action comes from knowing exactly what to do on a deeper subconscious level. Once you know the right thing to do in your professional field the only thing left to do is to get really good at doing the right thing over and over with discipline, perseverance, and many times faster than your opponent.
Habits are created only after knowing what you want to do habitually to move you toward your goals of being the best. New traders must first learn what they need to do in order to be profitable. The first step is to know the right questions to ask to get on the road to profitability. Building up their comprehension and vocabulary to understand what traders are talking about is a learning curve. Trading methods, trading systems, trading plans, risk/reward ratios, win rates, letting winners run and cutting losers short can sound mysterious to new comers to the financial markets.
All traders have to find their own edge over other market participants. There is a buyer for every seller on every trade. The person on the other side of your trade thinks they are right and you are wrong. They think they are making the right decision at the same time you are. The quickest edges that a trader can develop is to first study and do homework and learn about what works and what does not work in trading the markets. So few market participants actually do any research before they start their buying and selling that you can beat the majority by simply doing some homework on price history, the psychology of the market and its participants, and how the math works for creating long term profitability. The habit of learning every day through chart studies, back testing price patterns, interacting with experienced traders, and reading great trading material is one of the very best habits a new trader can develop. Traders need to develop the habit of wanting to be better today than they were yesterday and even better tomorrow than they were today. Growth comes from work not leisure. We will only get out of trading what we put into it, there are no easy short cuts only short paths to learning what you need to know.
The second way to give you an advantage over others is to trade in a disciplined matter with a trading system and a set of rules. Most traders are trading based on their own predictions, opinions, and emotions. Emotions, egos, and predictions may be the very worst trading signals and market timing indicators. This is the very reason that market price action is so counterintuitive. The very best signals of buying dips into key long term support areas and entering trades on breakouts of price ranges are the very things that traders find difficult to do as they believe that the support will not hold at a time of maximum fear and that a breakout entry is buying too high or selling too low at the beginning of a trend.
Trading rules help you take a more scientific approach to your trading; replacing your opinions with trade signals, your ego with position sizing, and your emotions with a trading plan. Once you have the right set of rules and follow them for a long enough period of time they will slowly become part of your trading personality and style. You will eventually rememorize them and follow them on a subconscious level. Your rules will eventually become second nature and it will be even uncomfortable to break them. Your trading rules are meant to keep you safe from making bad decisions in the moment due to your ego, fear, and greed. The goal is to make your trading rules more powerful than your impulses to make bad decisions with your trades during market hours. You want your logical and rational mind to write the trading rules when the market is closed that your emotions and ego have to follow while the markets are open. Better decisions and plans are generally made before prices start streaming up and down and real money starts to evaporate and grow. You want your trading decisions made with logic and reason in a neutral environment not by the fight or flight response in the heat of danger or profits.
Once you have learned the right questions to ask to be a profitable trader and written your rules based on the answers you found you follow them until they have stopped being just rules and are now your trading habits.
First you quantify your trading system for entries, exits, position sizing, and risk exposure. Then you create rules for implementing your system. You write down all these rules. You will have rules for methodology, risk management, and psychology. One of the hardest things to do is to actually follow these rules in real time, it will surprise you that you will not want to take an entry out of fear and will not want to take an exit out of greed. Your ego will make you not want to take a loss because you want to prove you are right about a trade. Your trading plan has to be designed to give you rules to force you to cut losses, take quantified entry signals, and take profits when it is time.
While a trading journal is a teacher that teaches the trader about themselves a set of trading rules is a body guard that protects the trader from themselves. The goal is that one day your trading rules become your trading habits. That is the day you become a professional with the natural tendency to do the right thing in your trading without having to look at your rules because they simply became what you do.
This is an excerpt from my book, it is Rule #1 here are 38 more rules: Trading Habits: 39 Powerful Rules for Stock Market Profits