So how do Traders Break Their (Bad) Habits? Part 2

In my last post, I started looking at what a trader can do to overcome their bad habits. Now here are some concrete steps that Joe Trader can do to help himself. This is not definitive. It's just a few things that I've found to be helpful.

Here's the first step: Read, read, read. I suggest that you start with the resources that I mentioned in my last post - especially Dr Steenbarger.

And here's the second step: Form a trading plan. A trading plan should identify what you plan to trade, under what circumstances, and what risk you will be willing to assume. Remember, amateurs look first or only at the anticipated reward. The pros look first at the possible risks, and how they can be minimized. Identify your entry and exit strategies. Ask lots of questions of successful traders to see if your plans are reasonable. Woodie's site is a wonderful resource with lots of people willing to step in and help. Step away from trading until your stress levels subside and READ, READ, READ.

The third step is to not sim or paper trade. I've seen a lot of people recommend that. But remember, repetition will LTP your neurons, whether you like it or not. And if you repeat and LTP bad trading practices, then all that sim trading will be for naught. Instead, I suggest that you listen to Woodie's FREE web cast and just passively absorb as much as you can until a good trading philosophy, and good trading practices become internalized. Just as an addict is removed to a safe, non-threatening and non-challenging environment in order create favorable circumstances for behavior change, so should you take the opportunity to do the same.

The fourth step is not to read about trading methodology, but read everything you can about risk/reward, risk management and money management. I'll start you off with an example: if you lose 50% of your money, you will have to make 100% in your next trade to get it all back. Go to Woodie's site and you can download a wonderful lecture by GB007 on money management. Towards the end, there's a chart showing the average win vs the average loss. STUDY IT!

The fifth step is to pretty much ignore back testing. The market is constantly changing. Instead, practice learning how to read the markets. Here's a fun exercise. Look up the upcoming conference call schedule. You can find them easily in Barron's, Yahoo Finance or by doing a Google search. Try to pick a small to mid cap stock (they can move more than a GE or MSFT). Also look for a stock that has good institutional ownership, around 40-60%. That will ensure that the big boys will get in and really move the stock if they like/dislike what they hear. Then, assign yourself 100 shares of that stock. You can listen in, if you want. I don't. Instead, I watch the price/volume action and try to determine what the Big Boys are going to do. Initially, there will be some see-sawing. This is noise, generated as small traders hear things and overreact. Ignore that and try to determine what the big boys are doing. It will be one of three things: They will buy, they will sell, or they will decide that they have enough of a position and do nothing. The average conference call lasts about an hour and you can generally find one that is held just before opening or at midday. This is an excellent exercise to help you learn to read a market and to make quick, decisive decisions. It also helps to develop patience and helps you learn how to filter out the noise.

The sixth step is to do an inventory of yourself. Again, do it in the hard, cold light of reality. Identify your strengths and weaknesses. Assign priorities to each and focus on one strength to augment and one weakness to overcome. Then formulate a game plan. Much as a football coach formulates a game plan, institute it and modify it, as needed. Determine what milestones you will use to measure your success in accomplishing your goals. If satisfied, pick the next strength to augment or the next weakness to target. By the way, you may be surprised at which you find to be the harder task.