The most dangerous form of trading you can undertake is Impulse Trading! Impulse trading is where you act without thinking… You take a risky decision, motivated by immediate reward, the rather than by the potential of the longer term negative consequence. It’s this kind of trading that can destroy your account.
So, if you are prone to impulse trading, then I suggest you stop what you are doing and read this article now.
Here are 7 reasons why impulse trading happens and how to prevent it from happening to you.
Reason #1: There’s only a 50% chance
Either you’re going to win or lose in a trade.
But here’s the thing. If you take a trade on impulse, you’re going to go against your strategy.
And even if you win, this will put you in dangerous territory.
This will set a precedent for you to do it again and again.
Before you know it, your entire trading plan will be based on gut and ego.
And eventually, you’ll hit that losing streak which will destroy your portfolio.
Remember, trading is a marathon, not a sprint.
Reason #2: FOMO
The Fear of Missing Out (FOMO) is a potent impulse in financial trading.
You might notice how other traders are winning and reaping the profits.
You’ll then feel desperate to jump on the bandwagon.
You may even try and rationalize your actions: “I’ll just step in briefly, let the market move to my advantage, and I’ll exit”.
Once again, you are failing to stick to a set of trading rules.
Don’t succumb to FOMO.
The market will always be there tomorrow. It will always present another opportunity.
And you’ll find a lot more higher probabilities than what your feelings will ever find if you stick to a strategy.
Reason #3: You compensate for losses
No-one wants to end the day in the red.
So, what do you do, you pile straight back into the market for one last trade.
You may even take the same trade but in the opposite direction.
And more times than not, the trade will stop you out again.
Instead of being down 2%, you’ll end up down 4%, 6% and maybe even more…
You need to understand that the market thrives on probabilities rather than emotions.
Accept the losses, take them in your stride and only take a trade when it aligns (according to your winning strategy).
Everyone has losing days.
So, integrate losses into your trading strategy until they become second nature and contribute to your portfolio growth.
Reason #4: Overconfidence
You’ve heard that the two biggest reasons that traders lose is due to greed and fear, right?
I think there is one very important and overlooked element that trumps greed and fear.
I’m talking about EGO.
Ego is a dangerous trait to have when taking a trade.
Your judgement becomes clouded with the illusion of superior skills, talent or knowledge.
And this will result in you making dangerous decisions for your portfolio.
Learn to be a more humble trader.
Either you need to humble yourself, or the market will.
Reason #5: No trading strategy
If you’re a new trader, just starting out, it’s exciting to learn a thing or two on the internet, and then take a trade.
You might see how to adopt trading lines (up, down and sideways).
You might see how to apply a charting pattern and when to buy or sell.
You might even see a trading analysis from one or two traders.
But this is NOT a strategy.
And you’ll end up taking way too many trades on a whim rather than a defined plan of action.
Rather find a mentor, or a proven system or service and study that first before you start trading. Check their track record. Learn the system and develop your own as you increase your knowledge. This is the only way to develop a consistent winning formula in trading.
You need to take the time and effort to create your own trading strategy.
Back and forward test them so you know exactly how to take a trade.
Every plan needs criteria such as:
• Where to place your entry
• Where to place your stop loss
• Where to place your take profit
• Quantity and size of the trade according to your risk profile.
• Reasons for entry
• When to know whether its a high, medium or low probability trade.
And in your trading journal you’ll need to have at least 50 trades taken, win rate, average winner, loser and what to expect with the drawdown.
Having this will stop you from taking impulse trades from other external factors.
Reason #6: The herd effect
Let’s follow on from Reason #5:
If you don’t have a well-equipped trading strategy, you’re going to most likely take trades based on what others are doing.
You will imitate the actions of others (in the news, media, or other traders).
Don’t get caught up in the herd effect.
Reason #7: Boredom kicks in
When the market is sluggish or moving sideways, you may act impulsively simply out of boredom.
Do yourself a favour, when you cannot see a high probability trade line up, shut your computer down.
And go and do something else.
