If you are reading this guide, you probably struggle with your impulses when you are trading. Maybe you take trades you shouldn't, or exit trades at the wrong times. Either way, when you feel that itch to act, it is hard for you to say "no" to it and just wait it out.
This guide is going to explain some of the reasons why Forex traders engage in impulsive trading, what can go wrong, and what you can do about it. First, let's explain why impulsive trading is such a bad habit.
Why impulsive trading will cost you
Impulse is defined as "a sudden strong and unreflective urge or desire to act." The word "unreflective" is very important here. When we trade impulsively, we are flying by the seat of our pants without taking the time to consider whether we are making a smart move.
There are several reasons why impulsive trading doesn't work out:
- Our impulses are unreliable.
- We break our trading rules.
- Impulsive trading can cause overtrading.
Sometimes we feel an impulse that is the result of a "gut feeling" about a trade. But no one can make a living just by going with their gut instincts. You would have to be psychically attuned to the market, and no one can claim to possess that superpower.
Moreover, impulsive decisions are choices that take us outside of our trading method rules or guidelines. Your rules were established through careful testing, and you have demonstrated that by following them, you can achieve certain results. Breaking those rules may cause your trading results to no longer match those expectations.
Finally, when we trade impulsively, we sometimes take on more trades than we can handle. Often, these trades may not be A+ setups according to our trading methods. Plus, as we spread our efforts too thin, we may make more mistakes.
Example #1
Sometimes, we take trades because we are frustrated or bored.
Below is a simple example of how this can backfire. Notice the bullish pinbar circled on the left. As you can see, this is a setup that did not trigger an entry. There are a couple of smallish pinbars you could have caught successfully after that, but let's say you missed them, perhaps because you got apprehensive.
Then you see this larger bar form that isn't really a great pinbar — the open and close are too far apart. But you impulsively take it because you are tired of waiting. Your entry triggers, and then the trade immediately goes against you, so you get out at a loss.
Example #2
Here is another example. Again, maybe you are just bored — or perhaps you are desperate to make some money, and you feel things are not moving along quickly enough. Either way, you impulsively find yourself looking at some pairs you would normally avoid because they do not exhibit the kind of smooth moves up and down that you can profit from using your strategies.
The USD/RUB has lots of crazy gaps, for instance. You may know nothing about how to trade these gaps or what they mean, but you start taking trades anyway. Unpredictable outcomes ensue.
Perhaps you saw those weird little flat bars in the middle of this gap, for example, and it made you think that price was consolidating and about to drop back down. So, you entered short, your trade triggered, and then price jumped up again.
Why do traders take impulsive trades?
Here are some common reasons why Forex traders impulsively trade.
1. Boredom
The vast, overwhelming majority of the time, Forex trading involves waiting for setups. Waiting, and waiting, and waiting. Some traders just get fidgety. They think they need to be doing something, so they start making impulsive trades just to feel busy and productive.
2. Impatience to profit
If you are taking longer to progress toward your trading goals than you would like, you might just get sick of it. Desperate for profit, you take impulsive trades, hoping they will help you sprint ahead.
3. Needing to be right/staving off anxiety
Sometimes we trade impulsively because we are struggling with anxious feelings. Maybe our win rate is not as high as we feel it could be, or something else is bugging us. But we want proof that we know what we are doing, and we want it now. So, we take trades to try and "prove" that we are right about the market.
Of course, these impulsive trades often just end up showing us the exact opposite — that we do not know what we are doing. Rationally, we would know to blame the impulsive trading and not our knowledge overall. But irrationally, these outcomes may instead feed into our anxiety, driving the cycle to continue.
4. Tilting after a loss
Going on "tilt" is a term that is often used in gambling circles. But it can apply easily when it comes to trading as well. It is a state of mind where we take one impulsive trade after another, and we think this will help us regain a lost sense of control. But in reality, each of these impulsive trades we take is making the situation worse and worse.
When we go on tilt, we give up the control that we do have — which is to take a break and not be impulsive. We just do not see what we are doing until it is too late.
5. Miscellaneous reasons
Finally, we sometimes take impulsive trades for a range of reasons that may seem almost random. For example, perhaps you forgot to get anything to eat this morning, or you are ill. Since you are feeling "off", the part of your brain that prevents you from acting on impulse is not performing at its peak efficiency. As a result, you are more susceptible to acting on a whim.
How can you avoid impulsive trading?
Way too often, when someone asks how they can avoid trading impulsively, someone else replies, "Just be more disciplined."
Saying this is a little like saying "cook until done" if someone requests a recipe. It says nothing about how to do it. If it were as easy as "just be more disciplined," we would all be more disciplined, and no one would be making impulsive trades.
1. Figure out what is driving your impulsive trades.
A good starting point is to determine whether there is a pattern to your impulsive trades. Pay attention to your thoughts and emotions the next time you feel that impulse. Are you feeling bored? Frustrated? Anxious? What do you hope the payoff will be if you take the trade (beyond the obvious)?
2. Become aware of your triggers.
Once you know what is motivating your impulsive trading, you can start looking for your triggers — specific events that often precede you firing off an impulsive trade.
Let's say, you identified boredom as your primary motivation for taking impulsive trades. You might discover you are easily triggered on days when you do not find any trade opportunities by a certain time of day. Or you might notice that you are more susceptible to placing impulsive trades while bored at work during the middle of the week, because you find your day job so monotonous.
3. Get in the habit of self-monitoring.
You need to start paying more conscious attention to your thoughts, emotions, and behaviors throughout the day. Start creating a habit of checking in with yourself on a periodic basis — maybe once or twice an hour, for example.
Each time you do, make some mental notes about your state of mind. And if you notice that you are exposed to your triggers or are experiencing thoughts and emotions you have learned are associated with your impulsive trading, you need to be ready to do something about it (more on this shortly).
4. Practice emotional regulation.
Learning to regulate your emotions more effectively can help you reduce impulsive trading. Much of this comes down to what we already recommended above — monitoring yourself and developing mindfulness of your emotions. Simple tricks can help too, like counting to 10, or recording observations. Both of these help you to detach a little from your emotions so you can observe them, rather than be compelled by them.
5. Have a plan for what you will do if you feel triggered.
Let's say you check in with yourself while you are trading, and you realize that you are in a situation where you might be triggered to want to make impulsive trading decisions. What can you do about it?
If you have pretty solid self-control, you may be able to just keep trading and simply refuse to act on your impulses.
But if you find that really challenging, it might be better to interrupt the moment. Come up with a way to break the thoughts and emotions that lead to impulsive trades. Even something like stepping away from your device and going on a walk for ten minutes might be enough to get you out of that state of mind. You can set a rule that you will only return to your charts when you are no longer in danger of letting your impulses run the show.
One of the best ways to help yourself avoid executing impulsive trades is to use position sizing software as it requires at least some level of planning and preparation. Our Position Sizer is a free and robust tool to help you take control of your trading habits.
Summary
Impulsive trading can be extremely costly. Not only can it result in you blowing your bankroll, but it can also wreak havoc on your self-confidence as a trader.
Thankfully, there are ways you can prevent impulsive trading that go beyond "just be more disciplined." Learn what drives your impulsive trading, identify and monitor for your triggers, improve your ability to regulate your emotions, and have a plan to disrupt your impulses before they translate into hazardous trades.
It may be challenging at first, but you will improve as you build new habits. Over time, you will become a less impulsive and more profitable Forex trader.
