Day Trader Behavior Cycles: The Foundations of Change

 

Reward and Punishment Cycles

THE QUESTION

What Behaviors Do I Repeat?

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 years before full-time immersion, I was approaching the market cautiously. But due to the highly bullish nature of the market, it seemed my cautious approach was nothing more than a hindrance.

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 just 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 that kept me from being consistently profitable was me. 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. Some examples are my recent loss days that have been documented (Day Trading SPY, TSLA & FRTX: 3/8/23 and Option Day Trading SPY and TSLA: 3/15/23). 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. On a random chance, one would at least think to win one of these times with a more prominent position size. But, no. This was not random and had everything to do with me.

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

MY PROBLEM

Behavior Cycle A

This behavioral cycle stems from adverse events, often with specific negative triggers. The more I tried to get out of the cycle, the more it seemed to repeat and the more frustrated I became. Finally, I realized that I perform well most of the time as I win most of my trades. Still, 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 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 the negative events of my trades, and even though I had success, I was continuously blind to my successful trades. So I was conditioned over time to do anticipatory reinforcement (punishment). This means that on the trades I place, I will anticipate the failure, so I would minimize positive outcomes if they did happen, and if there were adverse outcomes, it validated this behavior.

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, this is when 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. Time to change. Time for a different cycle. The adverse/negative events and triggers are what I constantly think about throughout the trading day, ultimately dictating my behavior and overall results. If these negative triggers can do this, what about the positive triggers?

THE SOLUTION

Behavior Cycle B

The solution is to focus on positive events. More specifically, positive triggers. This would be focusing on solid gains, sticking to trading plans, taking profits, and having small losses. If I cannot keep thinking about the positive triggers throughout the trading day, the risks of relapsing to the old way of thinking and behaviors will increase.


Positive events or triggers lead to success because they are rooted in making money or hitting a certain positive expectation. By focusing on positive triggers, I can start to have anticipatory reinforcement for rewards. In other words, beginning to 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 you are achieving success, you want to continue to achieve success, and that ensures the process keeps going.

NEXT STEPS

Foundations for Change

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 resolve my consistency issue and demonstrate an increasing profit chart with a positive slope. I am sure additional variables will come to light and will later need to optimize, but I look forward to what they may be. This is a journey; the path forward is apparent if you are willing to see it.