Impulsive trading is gambling in another form and it is one of the biggest downfalls for both novice and experienced traders. A trader hits a winning streak on a few trades and feels indestructible. Trade sizes are increased and previous rules for risk management go out the window. Many times the forex trader also abandons their rules based trading system, as the rush of potential easy money becomes overpowering.
There are four dimensions to Trade Impulsivity:
The trader is in a constant rush to hit the trade Jackpot and is not prepared to grind out their trading results, (one trade at a time) instead the trader is looking for the one big trade to wipe out previous losses or to double their account in one fell swoop.
- Trader Acts before he Thinks
The forex trader jumps in and wings it with no trade planning; pre, during or post trade and has a lack of patience for good trade set-ups to develop.
- Lack of Confidence
Most likely due to a knowledge deficiency of the instrument they are trading or having a proven system with an edge. The impulsive trader is operating in random market conditions with nothing more than a coin-flipping strategy.
- Thrill Seeking
The forex trader is seeking fun without thinking of the consequences. If you have deep pockets and this is how you roll, good luck to you! For those traders (the majority) without the deep pockets you need to recognize that trading is a business that you must grow and nurture. If you approach it like an all year round bungee jump, you might have some fun in the beginning but it will eventually end in tears.
So how do we Conquer Impulsive Trading?
- Stop jumping from one system to another
You must identify a trading approach for your entries and exits that works 60%+ of the time and apply this to your trade execution under all circumstances. If this means going back to a demo account to test approaches, do it. Better than losing more using random indicators.
At a minimum start understanding the unique characteristics of the instruments you intend to trade, what moves them, how they move and how this is reflected through price action on the charts.
Don’t ignore the news, as a good knowledge of this will support your directional view and allow you to see the market with both eyes wide open. No system is 100% accurate. The skill is identifying all the factors and working out the probability of success in the current environment.
- Create a Plan and a Set of Rules that you stick to
Sticking to a rules based approach will help remove impulsive tendencies. You only enter a trade when one develops based on your trading a system and this should be your only approach when executing entries and exits.
Having conditions or parameters that are required before entering and exiting a trade will increase the odds that the trade will be successful. Fight the urge to trade under any other circumstances.
- Focus on your Systems and Rules not Results
Having established an approach with an edge and a set of rules to your trading you now need to have confidence in your trade execution and decisions.
The focus needs to move away from results to the successful application of your system and rules. By taking this approach it should result in a positive profit curve over the medium term. Let the results take care of themselves.
By focusing on results only an impulsive trader might have a good day or week but will in all likely have a negative profit curve over the same period.
- Find a Trade Buddy
A trading buddy is a great way to keep you on track. Your roles here are to question each other’s trade decisions on a weekly basis and help each other improve as traders.
I have found that this works very well as you will be less inclined to be impulsive when you have to justify your trade decisions to someone else.
We are naturally impulsive creatures. If you want to sustain a long trading career you need to reign in this impulsivity by finding a system with an edge, sticking to your trading rules and focusing on the execution as opposed to results, otherwise your lifespan as a trader will be short lived.