If you’re a fan of self-improvement books like I am, then I’m sure you’ve heard of the book “Atomic Habits” by James Clear.
In case you haven’t or if you’re not sure how it all applies to trading, I’ve rounded up some helpful nuggets that you can put into practice.
You see, the book is a practical guide on how to be consistent about making changes for the better, with the goal of having these tiny habits compound into significant results.
Here are some key concepts to keep in mind:
1. Small habits, big difference
More often than not, we tend to focus on the major tipping point or defining moment that tells us we’ve made it. What’s typically overlooked are the tiny attempts at improvement that appear to make a marginal difference at a time.
However, the combined impact of these small but consistent changes over time can be astounding. As the GOAT Lionel Messi said:
I start early and I stay late, day after day, year after year. It took me 17 years and 114 days to become an overnight success.
When it comes to trading, it can be easy to underestimate the effect of seemingly mundane practices like maintaining a trading journal, reviewing both winning and losing trades, taking notes from price reactions to news events or keeping track of how currency pairs react to inflection points.
But when you put in the effort to stick to these habits day in and day out, it can become an innate part of your trading day and possibly even feel like instinct at some point.
Sooner or later, you’d likely be more in sync with the markets, being able to better predict how pairs might react to catalysts or which setups have a stronger probability of winning. James Clear writes:
This is one reason why meaningful change does not require radical change. Small habits can make a meaningful difference by providing evidence of a new identity. And if a change is meaningful, it is actually big. That’s the paradox of making small improvements.
2. Focus on your system more than the goals
In line with the first concept explained above, the second main lesson in “Atomic Habits” involves putting more thought into the processes and structures that make good habits doable.
Instead of looking ahead into how far you are from achieving your goals, Clear recommends that you channel these efforts into creating frameworks that can forge automatic habit loops. He writes:
The purpose of setting goals is to win the game. The purpose of building systems is to continue playing the game.
The process of building a habit can be divided into four simple steps: cue, craving, response, and reward. The cue triggers a craving, which motivates a response, which provides a reward, which satisfies the craving and, ultimately, becomes associated with the cue.
For instance, if you’re aiming to make trade journaling a habit, you have to make the cue obvious i.e. having your journal in your bookmarks or desktop shortcut.
Triggering the craving for me involves wanting to check the task off a list on my smartphone once I finish journaling. Where my fellow Type A folks at?!
To make the journaling task itself easy, you can create question prompts or bullet points that you simply have to fill in.
Lastly, apart from the satisfying action of clicking the box that says “Done!” on your to-do list, you can also give yourself a small reward (Can’t go wrong with a small snack or one episode of your favorite show!) every time you are able to complete all your trading-related tasks.
This is also applicable in breaking down bad habits, such as moving your stop losses, ditching your trading plan, and failing to update your trade journal.
3. The impact of identity-based habits
Lastly, James Clear also emphasizes the importance of consciously establishing your “new identity” or the kind of person you want to be. After all, he explains that your current behaviors are a reflection of your current identity.
Of course this also requires a deeper look into your current motivations and why you need to make changes. He writes:
It’s hard to change your habits if you never change the underlying beliefs that led to your past behavior. You have a new goal and a new plan, but you haven’t changed who you are.
Clear reiterates the need to have this “identity” in mind each and every day, so that you don’t fall out of the wagon and give in to one repeated mistake after another. After all, one bad instance is an accident, but two could mark the start of a bad habit.
If your new identity is somewhere along the lines of “consistently profitable trader” then you need to prove that to yourself with your daily actions:
Does this involve exercising discipline to follow your trade plan? Do you need to set aside time to monitor price action and record the results? Should you review your strategies and make adjustments?
To change your behavior for good, you need to start believing in the new and improved you. As often quoted from the book:
Every action is a vote for the type of person you wish to become.
How about you? What kind of trader do you wish to become?