The single most important trading habit is:
Prior to entering a position, define a "line-in-the-sand (LITS)" risk level
As an example, say you have a maximum tolerance for $300 risk per contract....you enter the market prior to defining your LITS, and despite having a mental picture of where price could move which would indicate your trade isn't working....price quickly moves to a price that is beyond your maximum risk tolerance.
Unexpectedly, all of a sudden you are staring at a paper loss which is greater than you were prepared for. The sudden change in events has a paralysing effect on your ability to think clearly. The position continues to move against you only impairing your decision making process further. You go into a state of internal conflict because you are wrestling with numerous conflicting thoughts such as:
"Why didn't I get our earlier?"
"What if I add to the position and get out at breakeven?"
"If it just reverses "x" points I'll cut the position"
"Should I just cut it now?"
"I can't believe I've done this again"
"Surely the market has to bounce just a bit here?"
and so the list goes on
The reality of trading is that many times the market does reverse and the position can be managed without a great loss. If you have experienced this personally, unfortunately, when faced with the above scenario, this only serves to cloud your ability to take action further.
The end result is the market continues to move against you and you are frozen into not taking action. By this time you may have increased your position size.....Eventually (could be minutes, hours or days) the personal pain or anguish becomes so overwhelming that you close out the position at a dollar amount much greater than your personal risk tolerance.
Rather than saying "I won't do this again" it's easier just to introduce a new habit into your trading which is to define your LITS risk level before placing the trade.
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