Normalcy can be a deceptive force, especially in domains where following your rules and protocols is important. One such phenomenon, known as the "Normalization of Deviance," transcends various fields, including day trading. Coined by sociologist Diane Vaughan in the aftermath of the Challenger disaster, this concept delves into the process by which what was once considered unacceptable gradually transforms into the norm over time, often in the absence of immediate consequences. This is especially prevalent in markets for the simple fact that the markets can and will reward poor trading behavior. If you have been trading for any length of time, you know that sometimes you can get paid for breaking your rules - and this is one of the worst things that can happen to a developing trader.

Understanding Normalization of Deviance

At its core, normalization of deviance reflects a dangerous shift in mindset. It occurs when individuals, buoyed by periods of success or lack of failures, begin to loosen their commitment to established rules and practices. This deviation from norms can manifest in myriad ways, and the consequences can be severe when applied to high-stakes activities such as day trading.

Risk Management Amnesia

One of the critical pillars of successful day trading is disciplined risk management. Traders meticulously plan their positions, set stop-loss orders, and define profit targets. However, the normalization of deviance in day trading may lead traders to take larger positions than planned, or even ignoring their stop loss - Exposing themselves to heightened risks. This deviation often occurs when initial successes breed overconfidence, blurring the lines of disciplined risk-taking. Have you have ever ignored your stop loss and still had that trade end up hitting your profit target? I have seen this behavior in countless traders that I have worked 1-on-1 with - They get paid, and the market rewards that bad behavior. This is how bag holders are created.

Abandoning the Trading Blueprint

Day traders (should be) crafting trading plans that map out entry and exit points based on thorough analysis. Normalization of deviance in this context involves traders deviating from these well-thought-out plans, and trading on impulse. Overconfidence or a belief in the ability to outsmart the market can lead to impulsive decision-making, disregarding the carefully thought-out plan.

The Temptation of Overtrading

Success can be addictive, and so can the emotional highs associated with profitable trades - This is especially true for developing traders that focus on the PnL and not the setup at hand. Normalization of deviance may drive day traders to overtrade—executing transactions excessively and deviating from their original, carefully calculated game plan. The desire for quick profits, being “green” on the day, or a “round number” in their PnL can cloud judgment, leading to risky behaviors.

Chasing Losses into the Abyss

Experiencing losses is an inevitable part of day trading. However, the normalization of deviance may prompt traders to abandon their pre-determined risk tolerance. In an attempt to recover losses swiftly, traders might take more aggressive positions, leading to a dangerous cycle (known as revenge trading) of increasing risk and potential further losses.

In conclusion, recognizing and addressing the normalization of deviance in day trading is paramount for long-term profitability. Traders must remain vigilant, regularly evaluate their practices, and resist the allure of deviating from their established rules. Disciplined risk management, adherence to trading plans, and a commitment to ongoing self-assessment can shield day traders from the pitfalls of normalizing deviant behaviors, ensuring a more sustainable and resilient trading strategy. If you struggle with sticking to your rules as a trader, or knowing what rules would be beneficial to your process, apply for 1-on-1 mentorship by clicking here.