Bad Trading Habits of Highly Ineffective Traders & How to Break Them

7 Habits of Highly Ineffective Traders & How to Break Them


This article on bad trading habits is the opinion of Optimus Futures.

Bad Trading Habits

  • Bad trading habits can quickly deplete your trading account.
  • Identifying your bad habits is half the battle, as many traders can’t easily recognize them.
  • Although the futures market is inherently risky, traders are often their own biggest risks.
When risking a large amount of capital in an inherently risky market using high leverage, bad habits can be debilitating if not deadly, figuratively speaking. That’s because you may be unaware of your own bad habits. The problem is that we may be the sum of our actions, and if our bad habits have more of an impact than our good actions, then YOU are your own biggest risk in the markets–and you may not even realize it.

Every trader has his or her own weaknesses, inefficiencies, and quirks. It is your job to get to know yourself a little better to understand, in detail, how you operate, consciously or subconsciously. Fortunately, the bad habits that many traders possess are rather common and fall into groupable categories: risk management, common sense knowledge, and discipline.

Here are seven major self-driven hurdles that may be holding you back from trading success.

Bad Trading Habits 1 – Failing to Manage Your Trading Risks

Maybe the problem is that you’re constantly holding on to trades gone bad. Or maybe it’s that you don’t know at what point a trade turns “bad,” regardless of whether it reverses or not.

Remember that a “bad trade” isn’t always a trade that loses money. That’s the outcome of a trade. A bad trade is one that you didn’t strategically envision or control from start to finish.

It sounds tricky, but here it is:

  • A bad trade that ends up with a profit is called “luck.”
  • A bad trade that ends up losing money is just a bad trade realized.
  • A good trade that ends up in profit is well-executed.
  • A good trade that ends up losing money is a statistically expected drawdown.
Profits and losses are all part of the trading enterprise. You need to expect both but in relation to a statistically favorable model (whether real or hypothetical).

No trader in the right mind would ever adopt a system or methodology that’s proven to fail from the get-go. Yet many traders hold on to systems that consistently drain their capital.

So if your trading approach is consistently losing, then either a) you didn’t vet the approach thoroughly beforehand, b) you don’t know how to assess a given approach (which is crucial), or c) your approach doesn’t come with a solid risk management strategy.

How to Fix It: Before you adopt any trading method or system, be sure you evaluate what you’re about to adopt. Make sure the data sample is large enough to sufficiently represent how it has performed over time. If you don’t know how to evaluate a system (and there are numerous ways to do this), spend a lot of time learning how to do it.

When you place a trade, you have to know not only the odds of the system you’re using but, on a tactical level, where your entry and exit points are, the size of your position, and the impact the trade might have on your overall capital should it turn out to be a losing trade.

Bad Trading Habits 2 – Not Distinguishing Win Rate from Size of Payoff

A trader boasts that his trades end up profitable 80% of the time. For every winning trade, he makes an average of $100. But for every losing trade, which is rare, he averages a loss of $400.

In the end, he nets zero market profits, but with trading commissions, fees, and other expenses, he nets a small loss, and plenty of time wasted.

Another trader has a dismal win rate of 20% wins. So 80% of the time, he loses money–in his case, an average of $100. But when he does have winning trades, he profits by an average of $500.

Ultimately, he comes out a net winner.

You’re probably wondering, how can the first person be so unprofitable when he’s winning so frequently, and how can the other trader come out a winner when he barely has profitable trades?

Win rate can’t determine profitability alone, and neither can the size of your (positive and negative) payoff. You have to combine the two. And this is something that many beginning or just plain “bad,” traders don’t understand.

How to Fix It: There’s a simple expectation-driven formula to help you analyze performance or evaluate the potential of a given method.

(Win% * average win) – (Lose% * average loss) = Expectation

If the expectation is above zero, then it’s potentially profitable; if below zero, then it’s potentially unprofitable. Zero means breakeven.

If you’ve been trading without knowing the above formula, then you might have been trading half blind. Apply it to your own trades and see how well you’ve fared.

Bad Trading Habits 3 – Revenge Trading After Taking a Loss

If you’ve ever read Sun Tzu’s The Art of War, then you understand the general principle of not rushing into battle. As he carefully states (and we paraphrase), you can’t ever force a win, but you can always be prepared to seize the advantage when it presents itself.

Revenge trading, particularly after taking a loss, is an emotionally driven attempt to force a win. It’s anti-productive, anti-strategic, luck-seeking, foolish, and all too common among undisciplined traders.

There is no system that incorporates revenge trading into its strategy. So, if you catch yourself revenge trading, either you’re trading without a strategy, or you’re going against your strategy.

How to Fix It: Follow your strategy. If an opportunity presents itself, then take it. If it doesn’t, move on. The “fix” is to tame your impulses.

If you can’t do it, then you might want to call it quits on trading or change your trading approach to something that might better suit you, whether it’s day trading, swing trading, position trading, investing, trying your hand at a different asset class, or hiring a professional to manage your portfolio.

Bad Trading Habits 4 – Jumping From One System to Another

Believe it or not, some people just can’t handle drawdowns, even in favorable (or winning) systems that provide historical drawdown stats.

If a system has an “average” drawdown of -30% and a worst-historical drawdown of -50%, then you shouldn’t be worried unless the current drawdown exceeds the worst-historical drawdown.

If it does, then you have to consider whether the current drawdown is the “new” worst-historical drawdown and will recover, or if the system is really just beginning to fail. But nevertheless, some people will panic even if the drawdown hovers around average.

Some traders will “ditch” a system to jump on another one that’s performing well–but only to catch its drawdown.  They will ditch that system and jump into another one again, catching that system’s drawdown.

In the end, some traders will have caught the worst performance of several systems that ultimately performed well. If this is you, then you’re in trouble, and your depleted trading account is proof of it.

How to Fix It: Pay attention to the average and worst drawdown of your system’s stats. Don’t panic if your drawdown hovers around the average. If it plunges below the worst historical drawdown, then you’ll have to re-evaluate the strategy.

Either it’s established a new worst historical drawdown, or the system is beginning to get outdated and might no longer be effective.

Bad Trading Habits 5 – Not Sticking to Your Trading Plan

Why deviate from your trading plan if you’ve fully analyzed it and have decided that you have full confidence in its performance?

If you’ve deviated from your system for no reasons concerning the “tweaking” of its mechanisms for improvement–meaning, you’ve thoroughly studied the impact of your alterations beforehand–then you’re simply being undisciplined.

This bad habit is a matter of personal impulse and distraction. In many cases, however, it reflects a lack of confidence in the system. And it’s your job to figure out whether your lack of confidence is justified or not.

How to Fix It: If you deviate from your system because you’re not entirely convinced that it can work even if you’ve thoroughly evaluated it, then developing greater discipline is the only solution. If you deviate from your system because you don’t have sufficient capital to trade, then stop and come back when you have sufficient capital.

But if you deviate from your system because you haven’t fully thoroughly evaluated your system, then stop trading and evaluate it (and don’t do that again).

Bad Trading Habits 6 – Sticking to Your Trading Plan When It’s Proving a Failure

There was EUR/CHF hedge trade that once worked before the Swiss National Bank pegged the Franc to the Euro in 2011. That trade proved a failure afterward.

There was another EUR-CHF trading system that worked while the peg was in place, that is until the SNB dropped the peg in 2015.

If you stuck with any of these methods, systems, or strategies without fail, then failure likely found you and drained you of your trading funds.

Here’s another example: someone begins trading a system that has a low average drawdown of 20% and a worst-historical drawdown of 35% (very low, by the way).

If the system experiences a drawdown below 20% then this is where you have to pay close attention to it. If it drops below 35%–its worst historical level–then you have to decide whether this establishes a “new” worst historical drawdown, or whether the system is fundamentally no longer viable (as in the examples above, for reasons concerning the larger market or economic environment).

Failing to be agile, is another way of adjusting to accept failure.

How to Fix It: Distinguishing between bad luck and a dying system is difficult, if not impossible. What you rely on at this point is your own personal loss limits. If your realized losses prevent you from taking more potentially favorable opportunities, then why not take them?

It’s not your fault that a system is operating well below its expectations (even if it does turn around). Here’s where you have to weigh potential losses against opportunity costs.

Remaining faithful to a system that’s clearly failing according to the “evidence” (or stats) at hand is not a testament to discipline. It just means you’re a sucker, and someone else just raided your money.

Bad Trading Habits 7 –  Getting Emotional and Impatient

There’s a saying that “good trading is boring.” If you’ve experienced this, you probably understand it well. You’ve already found a method that works. You see it lose sometimes, and you see it generate profits. At the end of a series of trades, you’ve generated more capital than you’ve spent or lost. That’s all it is.

If you have a method that works this effectively and you’re still emotionally on edge, then that’s a problem with your mindset. Maybe the system or the market doesn’t match your personality. If you can’t adjust to the trading environment, then why not try switching markets or methods?

Now, if you’re constantly on edge and your method isn’t working, then perhaps you have a good reason to be on edge–namely, that for one reason or another, something’s not working. Go back to square one. Evaluate the strategy. Go “meta,” meaning evaluate your evaluation, or your capability to even make an evaluation. Discover your errors, make improvements, and go back to your method. Do you have enough capital to trade? If not, adjust your method or market so that you do have sufficient capital.

If you have every reason not to feel emotional about your trades, if you have every reason to feel confident about your trades, and still you’re plagued with fear or greed, then perhaps trading isn’t for you.

How to Fix It: Anxiousness in trading is an important signal: there’s either something wrong with your method, your adoption of that method, or just you (your level of capital, risk tolerance, experience, or mindset).

Either the method doesn’t match your trading preferences and risk tolerance, or you might not be fully convinced that your system is favorable enough to trade (which in many cases it might not be).

This is something you have to figure out for yourself. There are many ways to correct this. But, there’s only one indication that tells you something definitive: if you can’t keep cool, no matter how effective the system, or no matter how much experience you’ve accumulated, then perhaps trading isn’t for you.

Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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