Download the Schwab app from iTunes®Get the AppClose

Trade Smarter—Break the Poor Judgment Chain

Find out how to better evaluate the human factors that can affect your trading outcomes and learn techniques to help you break the chain of judgment errors.

Three factors make up the framework for decision-making on any given day. Avoid succumbing to a chain of errors in judgment that can lead to hazardous trading and deviate you from your trade plan.

Whether you're a pilot or a trader, three main factors make up the framework in which we operate.

  • Environmental: Elements that define or affect the big picture such as the weather or the markets
  • Mechanical: Things that affect systems such as flight instruments or computers
  • Human: Things that affect us individually and could cause us to perform poorly

Environmental factors

Environmental factors are big picture items that impact us which we cannot control. Nevertheless, they affect our psychology and hence, our judgment. We need to be aware of how we react emotionally to either positive or negative environments—how elation or stress can affect our judgment and thought processes.

To that end, examine some of your trades that did not perform as expected. Look primarily at those that originally went according to plan but were derailed by an adverse move in the markets. How did you react? Did you honor your predetermined stop? Is there a pattern to your reactions in similar situations? Awareness of a decision-making pattern is the first step to correcting it.

Mechanical factors

For the pilot, mechanical factors include operational items such as the engine, instruments, and radios. Airline pilots spend the majority of their training in simulators with one or more system failures. This training has two purposes: 1) master the procedures required to overcome the system failure; and 2) instill confidence and minimize emotional reactions in the event of an actual system failure.

Traders, whose mechanical factors include computer hardware and software, internet and phones, can take a page from the airline pilots' guide to minimize potential errors. First, make sure your backup systems are truly independent. As an example, an uninterruptible power supply can protect your computer from a power failure. If trading online, make certain that you have your broker's support phone number written down close by. A computer glitch could take you offline and you won't be able to look up the number if your system is down. The key point is to think about potential system failures and develop a plan to deal with them before they actually occur.

Then, exercise your contingency plan by simulating failure of your primary systems and actually using your backup phone, computer and internet systems. Knowing that your backup systems really work instills confidence and helps minimize emotional reactions in the event of the real thing.

Human factors

Pilots use acronyms as mental checklists. One of these—I'M SAFE—helps individuals evaluate the status of human factors that could degrade our performance:

I Illness Am I feeling poorly?
M Medication Could medication impair my performance?
S Stress Am I experiencing abnormal life stress?
A Alcohol Am I under the effect (or after-effect) of alcohol?
F Fatigue Am I getting enough sleep?
E Eating Am I properly fueled for today's effort?

Like pilots, traders who have a cold, are taking anti-histamines, lack appetite and slept fitfully will not perform well. Yet how often do we push ourselves through these situations?

I'M SAFE can help you evaluate readiness for the day's decisions. It may be enough to realize that you are not at your best and simply concentrate harder before taking action. Some days, however, we may decide to take no action other than maintaining existing positions. As pilots say, it's better to be safe on the ground wishing you were flying, than to be flying wishing you were safe on the ground. 

The poor judgment chain

One error in judgment can have several unintended consequences. First of all, it can remove one or more possible solutions. Second, it increases the probability of another error in judgment on top of the first. 

The classic example is a pilot trying to get to his destination by continuing to fly in deteriorating visibility. This, in turn, removes his ability to fly by visual references and forces him to fly by instruments alone—which many pilots are not able to use effectively. Nearly all pilots can handle one error, but very few can handle three. This means it's critical to break the chain of judgment errors.  

For traders trying to get a profitable trade, a common judgment error is failure to honor a stop. This removes the positive outcome of preserving capital. Even worse, this increases the probability of further errors in judgment with regard to exiting a losing trade, thereby preserving less and less capital. While this sounds straightforward, how many traders, amateur and professional alike, have lost more money by failing to honor stops?


We can't control everything around us. But, we can control how we react to our circumstances and environment. This requires awareness of our conditions and an honest assessment of our state of being. Set yourself up for success by being prepared for what might come your way and make sure that you are focused on disciplined trading. 

Filtering the Market using Fundamental Analysis
How to Correct Hazardous Trading

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

Important Disclosures


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.