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This week’s question comes from Tavi, who asks:
I have a habit of making impulsive trades that ruin my chance of turning a profit.
How can I fix this?
Impulsive trading is something that all Forex traders struggle with, some more than others. Even I make the occasional impulsive trade from time to time.
More often than not, those impulsive trades turn out to be losers.
That isn’t surprising, though, when you consider that an impulsive decision is one without a plan. The very definition of the word impulsive is “done without forethought”.
Not exactly a responsible way to conduct a business.
The good news is that there are a few simple ways to avoid these impulsive trades. Although the three methods below are simple by design, I think you’ll find them to be incredibly helpful.
Let’s do this!
Not having a plan is perhaps the biggest contributor to impulsive trading.
With no plan at the start of each week, how will you know what to trade, let alone watch?
You won’t. That’s why it’s imperative that you spend some time each weekend reviewing your charts, drawing levels and constructing a plan for the week ahead.
Most of the pushback I hear on this topic has to do with not knowing where to begin. Or perhaps you’re unsure of how a plan should look.
The truth is, there is no one-size-fits-all answer. It depends on your style and preferences.
For me, I keep notes inside of an online trading journal. It’s the same platform that I provide to all new Daily Price Action members.
To be honest, most of what I plan to do each week is in my head. Whether you consider it a curse or a blessing, the currency pairs, key levels and potential setups I’m interested in are all memorized.
That doesn’t mean I don’t write everything down because I do. I enjoy having a written plan at the start of each week, even if it’s something as simple as a few annotated charts.
You can be as detailed or as brief as you’d like, just be sure to capture the essence of the plan. That includes writing the currency pairs and key levels you’re watching as well as any potential opportunities that may develop.
You can write it all down and include an annotated chart or just use an annotated chart to tell the story. The choice is yours.
My last piece of advice is to keep it simple. The more complex you make this process, the less likely you are to stick with it.
It’s no secret that I love the daily time frame. After all, I named this website Daily Price Action for good reason.
One massive advantage to trading the daily charts is that it slows things down. You’re no longer forced to make quick—and often impulsive—decisions.
Because it takes 24 hours for each daily candle to form, you have plenty of time to assess the situation and make an informed decision.
That alone can be the difference between a well thought out trade and an impulsive one.
I do occasionally trade the 4-hour time frame as well, but even that is much slower than something like a 5-minute chart.
However, if you are just starting out or still struggling to make a profit, you may want to stick with the daily time frame and nothing else. In fact, that’s the recommendation I most commonly make to members.
I can’t tell you how many times someone has contacted me after switching to the daily charts to tell me that they finally found some success.
It’s also no coincidence that trading legends like Bill Lipschutz and Ed Seykota take a longer-term approach, using the daily and weekly time frames.
So if you want to slow things down and avoid impulsive trades, consider sticking to the daily and weekly charts.
If you only take one thing away from today’s lesson, let it be this…
The more time you spend staring at your charts, the more you put yourself at risk of making impulsive trades.
You became a trader to trade, right? Of course, you did! So it’s only natural to want to find setups to put your capital to work.
This leaves you sitting in front of your computer searching for something to do, regardless of current market conditions.
If you want to take your trading to the next level, you have to start scanning for setups, not searching for them.
You see, when you sit in front of your screen searching for a trade to put on, you’re conditioning yourself to be unsatisfied until you’ve found one.
In other words, you feel like you have to put on a trade before you get up.
That’s a dangerous way to think.
I never sit down at my trading computer with the intent of doing something. In fact, I’d rather not do anything because then I know my trading capital is safe.
If I find something worthwhile when scanning my charts, I’ll take a second look. But I never spend more than 10 or 15 minutes looking through the 20 plus currency pairs I trade.
Now, for those just starting out with price action trading, it may take you a bit longer. Just be sure that you aren’t spending more than 30 minutes or so to scan your charts.
If you’re studying price action, that’s one thing. Take as much time as you need.
However, when reviewing your charts for opportunities, keep it brief and don’t go in with the intent of finding something.
It’s all too easy to get caught up in the market’s movement. Instead of seeing the associated risk, you only see opportunities passing you by. That’s a dangerous way to view the market.
Unfortunately, it’s the view of most novice Forex traders. The good news is that there are a few simple ways to avoid taking those impulsive trades that get you in trouble.
The first way is to have a plan. Every weekend you should carve out some time to analyze your charts for the upcoming week. That way when the market opens, you know which currency pairs to keep an eye on and where to watch for price action signals.
By sticking to the daily time frame, you avoid the need to check in throughout the day. It also slows things down so you have plenty of time to assess the situation and make a decision. There’s no need to be impulsive when trading the daily charts.
The longer you sit staring at your charts, the more likely it is that you will make an impulsive decision. Spend no more than 20 or 30 minutes scanning your charts for setups each day. If nothing from your plan jumps out at you, come back tomorrow.
Remember that you only need one good trade each month to make a considerable return in this business. Allow opportunities to come to you and never chase a market. If you miss an entry, so be it. There’s another one just around the corner.
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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