Best Habits to Improve Trading Psychology

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Knowing all the different cognitive biases and dangers of emotional decision-making can make us more aware of whether we are thinking logically and making the right decisions.

But it can hard to be on 100% alert all the time, especially on stressful days.

So, what are some of the simple habits we can cultivate to eliminate or reduce the risks of cognitive biases?

• Stay mentally neutral, even if you have open positions.
  Ask yourself, “if you did not have any positions at the moment, would you still choose to take the same position which you are currently holding?” 
  If you are unsure, you can always close the position and enter it again later.
• Have confidence in yourself and in your trading system.
  Every system will definitely have losing days, so if the losses are within the expected range, do not panic and discard or trading system too quickly.
  If your system works, it should recoup those losses and more on the winning days.
• Always use a stoploss.
  This helps to eliminate many of the negative impacts of cognitive biases, such as loss aversion bias, endowment bias, regret aversion bias, anchoring bias, optimism bias, cognitive dissonance bias, etc.
  Once you are stopped out of a position, you immediately become neutral, and can choose to take a position in either direction.
• Make sure you have sufficient data for your evaluation and testing.
  If you are doing backtesting for your strategy, make sure you test it over a sufficiently long period of time and under different market conditions.
  If you are evaluating your results and performance, make sure you have at least 100-200 trades before drawing any conclusions.
  This will help you eliminate the representativeness bias.
• Keep good trading results and also a trading journal.
  This will allow you to compare your decision-making process with the outcome of your decisions, and help you eliminate the confirmation bias, optimism bias, hindsight bias, overconfidence bias, optimism bias, and self-attribution bias.

If you would like to learn more about trading psychology, also check out: “The Complete Guide to Investing & Trading Psychology”

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Spencer Li

Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.