Day Trader Behavior Cycles: The Foundations of Change

As I stepped into the realm of trading full-time, I quickly realized how psychology and specific behaviors can positively or negatively affect trader performance. Beginning trading full-time in one of the most hyper-inflated markets and one of the best bull markets in history, I witnessed very volatile and drastic moves. 

Having been learning about the market on and off for a couple of years before full-time immersion, I approached it cautiously. However, due to the current market's highly bullish nature, my cautious approach continued to hinder me.



As I started participating in the market, I slowly fell into a false sense of security. I knew this wouldn't last forever, but the opportunity was too great to not push and be a part of the crowd. People made lots of money regardless of what or when they bought. Those who held and hoped were rewarded handsomely.

As the days, weeks, and months went on, I slowly started to let go of my cautious approach and was making more money and catching more opportunities. Then, as I gained confidence, I increased my position sizing. Looking back, it is funny because the day I decided to be bold, the market started to enter the bear market trend.

I was ready to increase my position sizing and reach the next level, but the market had other plans. Strategies and patterns were not working as well as before, so I needed to decrease position size and slowly add being cautious back to my routine. Unfortunately, I missed my opportunity to fully capitalize on that great market.

We are still in a bearish market, and excellent skills/experience are required to be consistently profitable. However, I do wonder if any traders grew exponentially during this time. If there were, the percentage of traders who could do this might be a small fraction of the consistently profitable traders.

Looking at my own trading, I realized that my patterns and strategies are sufficient to provide the necessary win rate and payouts to be consistently profitable/successful. Yet, I am still consistently unprofitable due to the very nature of my psychology/behavior.

My issues lie on a deeper psychological level. On top of learning day trading, patterns, and strategies, which will be other topics I will cover in future posts, I am currently focusing strongly on the psychological/behavioral aspects of my trading.

This issue was revealed early in my tracking spreadsheets while my strategies and patterns were performing as they should; the one thing keeping me from being consistently profitable was myself, specifically the way I traded in certain situations.

I was determined to define the issue. I observed a specific pattern within my trading that repeated in all of my trades last year and has resurfaced in my trading this year. 

As a brief overview, what happens is that after performing well for either the day, week, or month, a series of decent trades, I would take a more prominent position size relative to my usual sizes, maybe 2-3 times bigger, and as a result would need to cut the trade at a loss wiping out the previous hard-earned, often small, gains.

When this occurred, most of the time, it was a reasonable loss percentage-wise, meaning that it would have been an average loss if I hadn't taken such a colossal size. 

Moving forward, I would build up small wins and get my overall profitability trend heading in the positive direction again, all to repeat this process. 

Over and over again. By chance, you would think to win one of these times with a more prominent position size. But no, not me. 

This was not random and had everything to do with me.

What is this cycle, and why does this keep repeating?

Behavior Cycle A

This behavioral cycle stems from adverse events, often with specific negative triggers. 

The more I tried to break free of the cycle, the more it seemed to repeat and the more frustrated I became. 

I usually perform well and win most of my trades, but the issue lies with taking more significant losses that wipe out my gains. 

As a result, my profit chart would have a negative slope or show a decrease in profitability over time. This was mainly due to bigger sizes and taking expected losses on a percentage loss basis.

I always saw my trades' negative (adverse) events, and even though I had success, I was continuously blind to my successful trades. 

I conditioned myself over time to do anticipatory reinforcement (punishment). 

This means that I anticipate failure in the trades I place, so I minimize positive outcomes if they do happen. If there are adverse outcomes, this behavior is validated.

This led to perceived success, meaning I was okay with the results. 

For me, this happens the majority of the time. 

This happens until I want more. 

Then, when I want more, I repeat the cycle. 

By wanting more, I know there are other possibilities and better ways to achieve them, and the only way I know how to get them is to hold my positions longer or increase position size.

The primary catalyst to keep me in this cycle is wanting more.

I am tired of it. 

It is time to change. 

It is time for a different cycle. 

Throughout the trading day, I constantly think about adverse/negative events and triggers, which ultimately dictate my behavior and overall results. 

If these negative triggers can do this, what about the positive triggers?

Behavior Cycle B

The cycle focuses on positive events, more specifically, positive triggers. 

This would include solid gains, sticking to trading plans, taking profits, and having small losses. 

If I could not keep thinking about the positive triggers throughout the trading day, the risks of relapsing to the old way of thinking and behaviors would increase.

Positive events or triggers lead to success because they are rooted in making money or satisfying a positive expectation. 

By focusing on positive triggers, I could start to have anticipatory reinforcement for rewards. In other words, anticipate success so positive outcomes are encouraged. With this, I will achieve real success and will be satisfied. There is no wanting more in this cycle.

The primary catalyst for this cycle is sufficiency.

Knowing that I am achieving success, I want to continue to achieve success, and that ensures the process keeps going.

NEXT STEPS

To take my trading to the next level, I must successfully transition from Cycle A to Cycle B. 

Once I do that and sustain the transition, I am confident I will improve my consistency issue and demonstrate an increasing profit chart with a positive slope. Additional variables will come to light and need to be optimized later, but I look forward to what they may be. 

This is a journey.

The path forward is illuminated, and I must traverse it!