Habits and Trading Feedback Loops

Last updated on May 12th, 2020

Habits and Trading Feedback Loops - Infinity paper ringForming good habits and breaking old ones is important to anyone who is trying to become good at something. Whether it be becoming a concert pianist or giving up smoking.

Trading is no different. If you want to become excellent at what you do and create a long-term sustainable living out of trading, it’s absolutely crucial to become effective in consciously forming good habits and breaking bad habits.

To do this, dissecting each step of a habit and formulating your own trading feedback loop can go a long way to putting you on the road to success.

Trading Feedback Loop

A trading feedback loop is simply the act of trading, performance analysis, strategy adjustment and goal setting, all in a self-perpetuating loop. Done correctly, a loop should accelerate the learning process and magnify your efforts to find trading success. Done poorly or not at all and you’ll find that you are constantly getting bottle-necked by inaction and poor habits.

A trading feedback loop should be designed so that you are actively working on how to improve your results rather than haphazardly meandering without a clear idea of where you are going and how you wish to get there, which so often leads to bad habits forming.

Good vs. Bad Habits

A trading feedback loop can be categorized into two different groups as James Clear excellently highlighted in his recent post on feedback loops. James describes them as Balancing Feedback Loops and Reinforcing Feedback Loops.

The difference to whether a loop falls into one category or the other rests on whether you are trying to reduce the occurrence of a bad habit (balancing) or encourage the act of a good habit (reinforcing). But the interesting thing with trading is that because we tend to get better results when we reduce bad or increase good habits and worse results when we increase bad or reduce good habits, the type of feedback loop we’re targeting becomes blurred.

A reinforcing trading feedback loop might be staying focused and making sure that you take every occurrence of a particularly high probability setup. A balancing loop might be reducing the habit of self-distraction (think internet browsing, social media, emails etc.) when you are fully aware that the high probability setup is likely to occur.

Because of this kind of duality in many trading feedback loops, the task becomes harder. Harder because you are trying to switch directly from bad habits to good habits.

Completing the Loop

The basis of the feedback loop described is to Measure-Compare-Adjust. Whilst this is a good basis, there are additional pieces to a loop if you are attempting something big like say, becoming a successful trader.

I wrote a post Turn Your Knowledge Into Trading Success that covers my idea of a trading feedback loop in depth.

Turn Your Knowledge into Trading Success - Trading Feedback Loop

What needs to be added to the basic feedback loop to make it an effective, self-perpetuating system? First of all, there has got to be Desire. But desire to succeed in trading is all too often founded in desire to make a ton of money. Desire to succeed because you are passionate about trading will give you an edge in itself.

Learning a new skill is usually not easy. It takes time and effort to master most things. But when you trade, most people start off by trying to learn themselves. They are their own teachers and the only source of feedback they have is themselves. Understanding concepts, the value of key skills and recognizing where you are in the process are all things that need to be carefully considered if you are going to make the best use of your time.

This can mean that you may not be the best person to assess what you need to be doing.

This is precisely the same for goal setting. To assess performance, there must be a goal that’s realistic for you. If you set goals that you are never going to be able to achieve, the chances are high that you’ll become demotivated.

Finally, from all that you gain from each stage of your loop, it must lead to a situation where you have a deep sense of belief that what you are doing and how you are adapting and learning, is getting you closer to your overall goals.

Points of Failure

There’s another interesting point James makes in his post. It’s about where feedback loops fail. Let’s face it – they are not rocket science. But they frequently fail, probably through inadequate planning and accounting for problems in implementing things properly.

The reasons he cites for loop failure are: –

“Measurement isn’t automatic.

Comparison is irrelevant.

Feedback is slow.”

Automatic or at least easy measurement of performance makes a big difference. Having to manually record everything isn’t the end of the world, but to many traders it’s just another chore that they don’t want to be bothered by at the end of a stressful trading session. But failing to take the time when the information is fresh can lead to you not capturing all the information that you need.

Irrelevant comparison reflects what I’ve already noted about not understanding what it is you need to be doing. Thinking that you’re failing because you are just not making any money after a year of trading isn’t a good conclusion to draw. It may be that you are not trying to form good habits and do the right things, so in fact you are failing, but not simply because you are not making money.

Slow feedback is a killer for harnessing the potential power that a trading feedback loop has. My personal view is that traders who on average are taking one or fewer trades per day (and in fact it’s desirable to take more) are significantly handicapping their learning process. More trades means more valuable feedback (although you don’t need to go mad either – just look for at least 4 or 5 trades a day in my opinion as a good basis).

Trading Feedback Loops

Trading feedback loops are powerful, but so frequently people leave the learning process to chance, assuming or hoping that they will be good enough to navigate the journey. You might be one of the few who somehow just gets there, but the odds of that I’m afraid, are simply not in your favor.

Trade well.

More posts by Coach James can be found here

2 Responses to “Habits and Trading Feedback Loops”

  1. Toby Cannon

    Great article. I hadn’t considered half of these things. I think including a ‘belief’ section in the loop is a very important factor that sometimes gets overlooked. Nice one.


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