Trading Tips

How to Cultivate a Good Trading Routine

Every successful trader follows a routine that helps them make the most of every trading day. A trading routine is a habit loop that enables you to get in the zone and make rational decisions – and it’s all about repetition.

To quote famous philosopher Will Durant, “We are what we repeatedly do. Excellence, then, is not an act, but a habit.”

To establish a good habit loop, your brain needs regular cues that trigger an automatic response. For instance, a market pop or drop could be your cue to open or close a particular position—alerts that occur regularly program your brain to know which habit comes next.

And when there’s a monetary or emotional reward, your brain learns that a particular routine is worth remembering and starts prioritizing it.

When you develop healthy habits, you can mitigate losses and open up more profit opportunities. That’s why a good trading routine is critical. Here are the essential steps to developing it and becoming a successful trader.

Get in the trading zone!

Getting in the trading zone requires mental preparation. That means having a trading mindset and ensuring you’re psychologically and emotionally ready for the day.

If you’re stressed, preoccupied, haven’t slept well, struggling with distractions, or don’t feel up to the challenge, it might be best to take the day off. Seize the day only when you’re well-rested and emotionally composed.

Many traders repeat a trading mantra in the morning to get into the right mindset, so give it a try and see if it works for you.

Conduct a pre-market analysis.

Conducting a pre-market analysis before the opening bell is necessary to learn how your traded securities are doing and discovering new trading opportunities. The latest news and trends will help you keep up with the sector trends and market sentiment, so you’ll consistently have an idea about what drives the market.

M&As, IPOs, takeovers, bankruptcies, new product launches, company endorsements, and earnings reports are some of the things that can cause price spikes and gaps in the financial markets. So check your economic calendar every morning for such high-impact news capable of moving the market significantly.

Assess how the market’s direction might impact your portfolio.

Once you get a feel for the market, analyze how the current events might affect your portfolio or any individual positions.

For instance, moving forward might be wise if the market opens up higher and your portfolio or certain open positions are bullish. Conversely, if you have bearish positions, then you might want to think about certain adjustments.

Updating your plan (if necessary) before the trading day starts is an essential part of a good trading routine.

Review and analyze your latest trades.

Reviewing your latest trades (at least 100) will help you determine if your strategy is working.

Calculate your win/loss ratio or win rate to analyze your past performance and assess your strategy’s effectiveness.

You can do it by dividing your total number of wins by the total number of losses. If that leads to a win/loss ratio above 1.0, that is, a win rate above 50%, then stick with your strategy.

If your trading methodology isn’t working, it’s time to adjust it to try and get better results.

Check if some open positions need closing.

If you have any open positions, check whether you should clear some or all of them or keep them going. Do this about 15-30 minutes after the markets open up.

Perhaps some of the positions have reached a profit target or any other acceptable level. Clearing them off may be a great move to bank some profits before the market moves against you.

Look for trades that might need an adjustment.

If any of your trades have started moving against your initial expectation, adjust them to change their outcome.

For instance, if you have stop-loss and take-profit orders in place, you can adjust them to trigger at different levels, thus minimizing potential losses and increasing your chances of turning a profit.

Make new trade entries.

Closing positions and adjusting trades before making new trade entries is vital for seeing their overall impact on your portfolio. It helps you see the big picture, including what trades to get into next.

When making new trade entries and setting your position size, remember the 1% rule, that is, risking no more than 1% of your account on a single trade.

For instance, if you have a $50,000 balance, you shouldn’t risk more than $500 on a single position.

Instead of chasing the markets, make sure you calculate every trade’s risk/reward ratio before opening a position. A ratio lower than 1.0 doesn’t indicate a favorable trade. Unless it’s higher than 1.0, look for another, more profitable option for trading.

Step away from the markets!

Unless you’re a day trader, you should get yourself away from the markets after fine-tuning your trading portfolio and opening new positions.

You don’t have to be staring at the charts all day long to stay up-to-date with every single market movement. The financial markets are most volatile during the first two hours after opening up and the last hour before the close.

So, step away from the computer, make the best use of your time, and recharge your batteries. Life is all about balance.

Head back in for EOD trading.

EOD (End of Day) trading allows you to capture profits off of the last available prices.

The key is to look at everything that has changed during the day, as there might be some entry and exit opportunities that weren’t there in the morning.

So, see what’s moving, adjust your orders if necessary, look for new profitable trades that you could get into, and get out of those that might be moving against you.

Analyze your trading day.

After the closing bell, analyze your performance and make notes of the key takeaways. Go over your trading strategy again, identify potential mistakes and areas for improvement, and devise a proper action plan.

Keeping records will help you learn how and why you won specific trades, so you know what to focus on and how to recognize opportunities. It will also give you an insight into the factors that made you lose other trades, so you can avoid repeating past mistakes.

It’s all about continuous learning, tracking and maintaining your progress, and improving your trading in the long run.

The bottom line

A good trading routine is essential to making rational, habit-based decisions that are free of emotional bias. It’s what separates amateur traders from the pros.

Cultivating it may take a lot of work, but the only way to reap the rewards and win for the long haul is to be consistent, persistent, and disciplined.

Depending on your chosen markets and trading style, your trading routine may include slightly different steps than those above. Regardless, turn them into habits, stick with a tried-and-tested trading strategy, and you’ll be on a path to becoming a successful trader in no time.