Trading habits are an important factor when comparing successful and unsuccessful investors. That’s why it’s never a bad time to revisit good trading habits that we should strive to keep and bad trading habits we should avoid. Don’t get me wrong, successful traders may use bad habits daily, but they know when to pull the plug and move on. The same goes for unsuccessful traders who have all the good intentions in the world and can’t get a break from the stock market. Today, we’ll do a little review on the subject of good vs bad trading habits when investing.
We begin with the most difficult part, installing good trading habits. The key to all the habits below is consistency.
Repeating them throughout our investing career will lead to successful trades in the long run.
Having good vs bad trading habits is what’s going to make or break you as a trader. So let’s get into the good trading habits you can practice.
Set a Plan and a Strategy
First, deciding on a portfolio strategy is a good starting step, especially for new investors. So many securities are available, and we must choose which ones fit our investment goals and timeframe.
We can take the example of a young investor starting their first job. Their investing timeframe is for multiple decades, and the risk tolerance should be very high.
To spread the risk, the portfolio should have a mix of ETFs and stocks that aren’t in the same sector. Deciding which securities to buy is the initial challenge and requires research.
Finding a balance between growth and value stocks and small/mid/large-cap stocks is a good strategy.
The next step is to determine a strategy for each stock. How long are we planning to keep it? How much loss can we tolerate? When do we sell if the stock is performing well?
This is where it’s important not to be greedy on a winning trade and to know when to cut our losses short. Unless you are a passive investor, setting trade limits based on the strategy and risk tolerance chosen is important.
Good vs Bad Trading Habits: Consistency and Discipline
As I said earlier, consistency is a big key to success. It’s ok to deviate from the plan when an opportunity arises. However, changing strategies often and making trades because people online do them isn’t always the best way to go.
This requires discipline. Self-control and keeping our emotions in check are very valuable down the road. Discipline is especially important with money. Keep that in mind when learning good vs bad trading habits.
Before buying anything, performing adequate due diligence from quality sources is essential. Social media can be a good source of stock ideas. However, there is a lot of junk out there also. It can be a good idea to start, but more research must be performed.
Reddit has many subreddits with quality posts, and Facebook also has public and private investor communities, as do TikTok and Discord. Filtering the good ones from the bad ones will save some time with future research. Stick to facts and evidence.
Don’t put all your eggs in the same basket. Invest in securities that aren’t correlated. When one drops significantly, the others shouldn’t be affected similarly. Diversification helps portfolios grow in the long term.
If you anticipate a sector to boom, have an entry and exit strategy, but don’t stay invested in one sector for too long. Keep a mix of different ETFs and stocks to diversify your exposure. If you can, have some cash for a day when the market drops significantly. So have diversification in your good vs bad trading habits.
Good vs Bad Trading Habits: Time
Finding the necessary time to conduct our research is not always easy. Most investors have a full-time job and a family to take care of. On the other hand, finding the time to perform adequate due diligence shouldn’t be a problem for those who make a career out of investing.
In both cases, it is essential to take the time to do some research before jumping on an investment. Those are good vs bad trading habits.
Remember how education was an important part of our development. Stock market education is just as important. Taking the time to learn trends and various indicators is just as important.
We offer classes on various subjects for investors of all levels. So much valuable information is available, but it requires time to learn everything. So little by little is always better than nothing.
Good vs Bad Trading Habits: Emotions
The best investments aren’t made while we are emotional. Instead, they’re due to all the factors listed in this section.
Trading with our emotions often leads to mistakes. Instead, we can get FOMO and buy a stock that’s running.
However, the stock peaked, and the price began to drop. Keeping our emotions in check helps us make rational decisions that benefit us in the long run.
After multiple bad decisions, funds might begin to run out. If you can’t afford to lose anymore, maybe it’s time to put the ego aside and take a break from the stock market.
Similarly, after multiple winning trades, the ego can’t take over. Decisions must remain rational and calculated despite recent success. That is the key to good vs bad trading habits.
The internet is full of information. It cannot be easy to filter through everything. There are plenty of websites and people who pot about conflicting information.
It isn’t easy to find the truth in everything. So finding and sticking to reputable sources is especially important.
If adhering to certain good habits becomes too difficult, it may be better to stick to ETFs or financial advisors. It may be boring, but better for the bank account.
Bad Trading Habits
Once we can name all the positive trading habits, it’s easy to name the negative ones. Everything that opposes the points above can be considered negative.
Deviating from our strategy, not being consistent and disciplined, not doing enough quality research, lack of diversification, not dedicating enough time, trading with our emotions, and using bad sources can all lead to negative performance.
The negative habits below can also lead to poor performance. So these are things to avoid when forming good vs bad trading habits.
Fear is a common emotion. Trading can lead to doubt before buying or selling a security. Fear is especially present after a bad trade.
Every trade must be analyzed independently. However, if the appropriate research was performed before buying the security, there is (almost) nothing to fear.
I can suggest one tip to minimize fear after a bad trade. Learn from your mistakes by analyzing the trade and what could have been done differently.
At the same time, look for indicators and trends that could have predicted the mistake. This will lead to more courage and valuable knowledge for the future.
In a way, investing is similar to gambling. It is a high-stakes casino, and the odds of succeeding depend on factors we can’t always control. If you can’t spend an hour without looking at your holdings and their price movements, you might be addicted.
The same applies if you’re always looking for the next trade just to be able to buy something. Consider a break if it’s taking over your life. Alternatively, stick to ETFs and stay away from individual stocks.
Ignoring the Trend
Following a trend is often a good strategy. However, many investors decide to ignore it. I understand if the stock is on the third day of a wild run.
Nevertheless, I don’t see why not jump on the opportunity if there is big volume, positive news, or a sector run. Then, even institutional investors will take a swing at the stock.
Set limits and be prepared to change them if the stock keeps running upwards. Ignoring a strong and justified trend has more downside than upside.
You’ll not take advantage of the situation if it keeps going up. But, sometimes, following others can be beneficial.
To conclude, being an investor isn’t easy. It should be considered a part-time or, for some, a full-time job. Hence, taking the same precautions at work becomes necessary. Avoiding certain behaviors and prioritizing others can be game-changing.
It may take a lot of effort or be time-consuming, but at the end of the day, it is worth and positive results will happen. Investors can’t always rely on luck to succeed.
In most cases, it may be better to stick to ETFs or financial advisors for better results. It takes some fun out of the game but brings more money to the bank account.