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About Impulsive Trading
A lot of traders are impulsive. Last month, someone I know, decided to trade retail stocks. After a careful analysis of all
available information, he had a hunch that retail sales in November were going to be better than expected, so he bought
stock in a few major retailers. He was right. All he had to do was sell at the right time. On Wednesday, he watched an early
rally resulting from positive reaction to stronger-than-expected retail sales in November. Unfortunately, it didn't last long.
Sentiment changed when weekly crude and gasoline inventories data showed a decline. Although this is nothing unusual,
Jack reacted impulsively. Right or wrong, his long term plan was to wait patiently for his portfolio of retail stocks to go up,
which he expected to occur by the end of the year, but when he saw the early rally fizzle, he panicked. Without thinking he
decided to abandon his plan and sell off his positions. Over the weekend, though, he thought thin gs over and now regrets
his decision. He laments, "Why was I so impulsive? I should have calmed down, rationally examined my plan, and traded
decisively."
This example isn't unique. Every day, traders close out positions prematurely out of panic. Sometimes the consequences
are minimal, but other times, a wrong move at the wrong time can deplete precious capital. What can you do to control
impulsive actions and maintain discipline ?
First, assess the situation realistically. When your money is on the line, it is difficult to stay calm. Even the most
seasoned traders are a little on edge when their money is on the line. How much are you risking? If it is more than you can
afford, it is unrealistic to think that you can remain completely calm. You may want to consider reducing your risk, or if that is
not feasible for the setup you are considering, you may want to forget the trade altogether. On the other hand, if you are
risking relatively little capital and can easily survive the worst-case scenario should you lose, then it may be helpful to
continually remind yourself that not much harm can come to you, and that you might as well keep your cool.
Second, don't underestimate the difficulty of controlling your impulses. Controlling your impulses takes psychological
energy. When you are tired, hungry, or stressed out, you will have difficulty controlling your impulses. It is essential to take
precautions. Make sure you get plenty of rest. Make sure you are properly nourished, and do everything possible to relieve
stress. Exercise, avoid personal conflict, and make sure background hassles are minimized. The more energy you have to
concentrate on your trading, the easier it will be to maintain discipline. It is difficult to maintain discipline, but not impossible. If
you take precautions, you can stay calm, disciplined, and able to trade in a winning, peak performance mindset.
A lot of traders are impulsive. Last month, someone I know, decided to trade retail stocks. After a careful analysis of all
available information, he had a hunch that retail sales in November were going to be better than expected, so he bought
stock in a few major retailers. He was right. All he had to do was sell at the right time. On Wednesday, he watched an early
rally resulting from positive reaction to stronger-than-expected retail sales in November. Unfortunately, it didn't last long.
Sentiment changed when weekly crude and gasoline inventories data showed a decline. Although this is nothing unusual,
Jack reacted impulsively. Right or wrong, his long term plan was to wait patiently for his portfolio of retail stocks to go up,
which he expected to occur by the end of the year, but when he saw the early rally fizzle, he panicked. Without thinking he
decided to abandon his plan and sell off his positions. Over the weekend, though, he thought thin gs over and now regrets
his decision. He laments, "Why was I so impulsive? I should have calmed down, rationally examined my plan, and traded
decisively."
This example isn't unique. Every day, traders close out positions prematurely out of panic. Sometimes the consequences
are minimal, but other times, a wrong move at the wrong time can deplete precious capital. What can you do to control
impulsive actions and maintain discipline ?
First, assess the situation realistically. When your money is on the line, it is difficult to stay calm. Even the most
seasoned traders are a little on edge when their money is on the line. How much are you risking? If it is more than you can
afford, it is unrealistic to think that you can remain completely calm. You may want to consider reducing your risk, or if that is
not feasible for the setup you are considering, you may want to forget the trade altogether. On the other hand, if you are
risking relatively little capital and can easily survive the worst-case scenario should you lose, then it may be helpful to
continually remind yourself that not much harm can come to you, and that you might as well keep your cool.
Second, don't underestimate the difficulty of controlling your impulses. Controlling your impulses takes psychological
energy. When you are tired, hungry, or stressed out, you will have difficulty controlling your impulses. It is essential to take
precautions. Make sure you get plenty of rest. Make sure you are properly nourished, and do everything possible to relieve
stress. Exercise, avoid personal conflict, and make sure background hassles are minimized. The more energy you have to
concentrate on your trading, the easier it will be to maintain discipline. It is difficult to maintain discipline, but not impossible. If
you take precautions, you can stay calm, disciplined, and able to trade in a winning, peak performance mindset.
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