Saturday, March 21, 2015

Best Practices in Trading: Breaking Your Cycles

The first step in changing any damaging behavior pattern is interrupting it.  When we interrupt a pattern, we necessarily stand apart from that pattern.  We control it and refuse to let it control us.  When our patterns show up during trading--patterns of negative thinking or patterns of poor trading--a surprisingly powerful response is to simply pause what you're doing, identify the negative pattern, and refuse to let it control you.

One implementation of this idea comes from reader Eldad Nahmnay, a daytrader who shares his five minute rule:

"After reviewing my trading, I saw that I had a lot of repetitive trades.  By this I mean that less than five minutes after I had closed a trade, I was back in a new one.  Usually this occurred after a losing trade.  This made me realize that I hadn't accepted the loss completely and was looking for a sort of revenge.  After understanding this, I added the five minute rule:  after a trade, I close the system for five minutes when I ask myself the following questions:  What have I done well for this trade?  What can I take away to help with later trades?  Do I have any open emotions that can affect me later?  Did I do anything that violated my trading rules?  

After answering these questions, I take a minute or two away from the screen to come back fresh.  The number of poor trades that I took was reduced by more than 70% after I implemented this rule."

Notice this Eldad's rule is really a routine to develop mindfulness in the middle of the trading day.  By taking a break after closing each trade, he is able to stand apart from markets (and his reactions to markets) and ask himself key process questions.  The five minute break interrupts any negative patterns that may have leaked into his trading and helps ensure that a single bad trade doesn't become a series of bad trades.  By instituting the break after every trade, the trader turns mindfulness--and the breaking of negative cycles--into a positive habit pattern that gives both perspective and control.

Further Reading:  Brief Therapy and Becoming Your Own Trading Coach