A common characteristic that we often see among traders is that we tend to repeat our mistakes. We stray from our risk limits, hold losing trades longer than we should and sell even though our trading plan says not to. Of course, everyone makes mistakes, but especially in the often difficult world of trading, we must maintain discipline if we are to be successful. Now, I’m not going to say that this is easy. As humans, we tend to act impulsively. The question is, how do we combat these impulses? One way is to establish a simple plan and remember why it is so important to stick to it.
As humans, it seems that we have a need to complicate matters. We over-analyse things and are leery about things that are simple. We seek out explanations for why we make the same trading mistakes and rather than look for the simple reason, we dig for some unconscious motive. We come up with theories that we don’t want to become wealthy because money is the root of evil or maybe we feel unworthy of profits so we sabotage our efforts to become wealthy. Perhaps this is the case, but rarely do we think of the simple, uncomplicated reason which is our human tendency to make simple plans and stick to them.
Science backs up this theory. Studies conducted by psychologists show that regardless of the behaviour, whether it’s giving up smoking, losing weight or something else we want to change, we struggle to gain control over our impulses to engage in those behaviours. That being said, there are some strategies that can help us to make changes. For example, once we come up with a simple plan, we should pay attention to what it is that gets in the way of us following it. Then, we will need to keep reminding ourselves what benefits we will enjoy by staying with our plan.
Let’s look at an example of how this works. If we were to struggle with maintaining our risk limits, we would begin by looking at some simple explanations for why this may be. Perhaps we aren’t getting enough sleep and it affects our ability to focus and make rational decisions or maybe we crave more excitement so we act impulsively. We all have our specific reasons, but once we identify them, we know what to look out for and have a much better chance to avoid letting them take control. This is not an easy exercise and it may be necessary to make a few more mistakes in order for us to determine exactly what it is that is leading to those mistakes. It may seem obvious, but the next action we need to take is to understand why we need to make changes in our behaviour. Write it down on an index card. For example, “if I continue to make the same mistakes, I will lose all of my capital”. Then, say this over and over until it sinks in. Now, this isn’t a fool-proof solution for changing our behaviour, but it can help. We are hard-wired to resist change, but when we repeat something often, we tend to start believing it more.
Just as we should repeat the reasons we need to change, we should also develop a mantra that will keep us on track. It reminds us that we can accomplish what we want to achieve. So, if we have a tendency to sell prematurely, we want to repeat something like, “I will keep to my trading plan and I will hold on to my trade until the price hits my profit objective.”
Repetition is key and while it may seem quite obvious, it will keep us from making the same mistakes we have made over and over again. Sometimes, simplicity is exactly what we need to move past the behaviours that hold us back from reaching our goals.