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Trading Mindsets Lesson – Impulse Trading

In this article we are going to investigate the concept of bad and the good trades.
We’ll note that good trades are a result of making ‘good trading decisions’ but having said that may still have ‘bad outcomes’.
Conversely, bad trades are a robo forex result of making ‘bad decisions’ and on occasion may just result in ‘good outcomes’.
The trader’s best weapon in breaking the mold of most novices who lose wads of cash in the market is to focus only on making good trades, and worrying less about good or bad outcomes.
In our Workshops we attempt to deliver students strategies that assist identify the best trades to suit particular and personal trading specifications. We have a number of trading strategies which can be used to experience rewards from the currency markets, with each strategy using a particular structure or ‘setup’ to make a smart trade. Most traders however don’t have such a structure, and as a result, many times succumb to the dreaded ‘impulse trade’.

This is a largely overlooked concept in investing literature and refers to an unstructured, non-method, or non-setup trade.

Succumbing to Improvisation

We’ve all been there!

You look at a chart, suddenly see the price move around in one direction or the other, or the charts might form a short-term pattern, and we jump in before considering risk/return, other open positions, or a number of the other key factors we need to think about before entering a trade.

Other times, it can feel like we place the trade on automatic preliminary. You might even find yourself observing a freshly opened position thinking “Did I recently place that? “

All of these terms can be summed up in one form – the impulse trade.

Impulse trades are bad because they are executed without proper analysis or method. Successful investors have a particular trading method or style which serves them well, and the impulse trade is the one which is done outside of this usual method. It is a bad trading decision that causes a bad trade.

But why would a trader suddenly and spontaneously break their tried-and-true trading formula with an impulse trade? Surely this doesn’t happen many times? Well, unfortunately this occurs all the time – even though these transactions fly facing reason and learned trading behaviours.

Even the most experienced traders have succumbed to the impulse trade, so if you’ve done it yourself don’t feel too bad!

How it Happens

If it makes no sense, why do traders succumb to the impulse trade? As is usual with most bad investing decisions, there’s quite a bit of complex mindsets behind it.

In a nutshell, traders often succumb to the impulse trade when they’ve been keeping bad trades for too long, hoping against all reason that things will ‘come good’. The situation is made worse when a trader knowingly – indeed, willingly – places an impulse trade, and then has to deal with additional baggage when it incurs a loss.

One of the first psychological factors at play in the impulse trade is, unsurprisingly, risk.

Contrary to everyday opinion, risk is not necessarily a bad thing. Risk is simply an unavoidable part of playing the markets: there is always risk involved in trades – even the best structured transactions. However, in smart trading, a structure is in place prior to a transaction to accommodate risk. That is, risk is factored into the setup so the risk of loss is accepted as a percentage of expected outcomes. When a loss occurs in these situations, it is not as a result of bad/impulse trade, nor a trading mindsets problem – but simply the result of adverse market conditions for the trading system.

Impulse trades, on the other hand, occur when risk isn’t factored into the decision.

Risk and Fear

The mindsets behind taking an impulse trade is simple: the investor has a risk because they are driven by fear. There is always anxiety about losing money when one plays the market. The difference between a good and a bad trader is that the former is able to manage their fears and reduce their risk.

An impulse trade occurs when the trader abandons risk because they’re afraid of missing out on what looks like an especially ‘winning’ trade. This impulse emotion often causes the investor to break with their usual formula and throw their money into the market in the hope of ‘not missing out on a potential win’. However, the impulse trade is never a smart one – it’s a bad one.

If the trader identifies a potential opportunity and spontaneously decides they must have the trade – and then calms down and uses good strategy to implement the transaction – then this is no longer an impulse trade. However, it the trader disregards a set-up trigger or any form of method in making the trade, they’ve thrown caution to the wind and have implemented a bad trade.

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