Online Forex Trading Strategies

Forex trading strategies are the key to successful forex trading or online currency trading. A knowledge of these forex trading strategies can mean the difference between a profit and a loss and it is therefore imperative that you fully understand the strategies used in forex trading.

Forex trading is very different from trading in stocks and using forex trading strategies will give you more advantages and help you realize even greater profits in the short term. There are a wide range of forex trading strategies available to investors and one of the most useful of these forex trading strategies is a strategy known as leverage.

This forex trading strategy is designed to allow online currency traders to avail of more funds than are deposited and by using this forex trading strategy you can maximize the forex trading benefits. Using this strategy you can actually utilize as much as 100 times the amount in your deposit account against any forex trade which will make backing higher yielding transactions even easier and therefore allowing better results in your forex trading

The leverage forex trading strategy is used on a regular basis and allows investors to take advantage of short term fluctuations in the forex market.

Another commonly used forex trading strategy is known as the stop loss order. This forex trading strategy is used to protect investors and it creates a predetermined point at which the investor will not trade. Using this forex trading strategy allows investors to minimize losses. This strategy can however, backfire and the investor can run the risk of stopping their forex trading which could actually go higher and it really is up to the individual trader to choose whether or not to use this forex trading strategy.

An automatic entry order is another of the forex trading strategies that is commonly used and this strategy is used to allow investors to enter into forex trading when the price is right for them. The price is predetermined and once reached the investor will automatically enter into the trading.

All these forex trading strategies are designed to help investors get the most from their forex trading and help to minimize their losses. As mentioned earlier knowledge of these forex trading strategies is vital if you wish to be successful in forex trading.

The Four Keys of Identifying Winning Trading Strategies

Most traders are on a constant quest to discover winning trading strategies. And yet, very few Traders are ever able to find and successfully implement these winning trading strategies.

Why is that? What is it that is so elusive about these winning day trading systems and strategies? Where can you go as a Trader to find the most powerful and accurate winning trading systems and strategies available?

The fact of the matter is that most well-thought-out day trading systems and strategies can and should be winning day trading strategies IF the Trader has discipline – both in following the day trading strategy exactly, and also in sticking with the trading strategy.

Yet it seems that most day traders will try what should be a winning trading system or strategy just once or twice, and if it doesn’t immediately yield positive results, these traders quickly abandon it and move on to the next “hot trading tip”.

And these same Traders wonder why they can NEVER create consistent Day Trading success – why they can never lock in on that one winning trading strategy.

To help you along on your quest, we’ve created a four-step punchlist for you to follow as you continue your quest to identify winning trading strategies. Pay close attention to this list – it could be the “game changer” you’ve been looking for as a Day Trader.

The Four Keys To Identify Winning Day Trading Strategies:

1. Keep It Simple, Stoopid! The best day trading systems and strategies are also the easiest to learn, understand, and master. The more complicated a trading strategy (and believe me, in the world of technical analysis, there are PLENTY of ultra-complicated trading strategies), the less like you’ll ever be able to turn it into a winning trading strategy for yourself.

When looking for winning trading systems or strategies, find those that are simple, easy to execute, and that don’t require an advanced degree in statistical theory to comprehend.

2. Speed Is Your Best Friend. The longer you’re in a trade, the more time there is for something to go wrong. When searching for those elusive Winning Trading Strategies, find one that allows you to be in and out of a trade very quickly (my average trade lasts less than one minute).

Find day trading systems that don’t focus on “long term” trading (i.e. anything longer than a few minutes) – it’ll be better for your trading account AND your stress level.

3. Don’t Be A Stock Chart Zombie. Most (nearly all) trading systems or strategies require you to spend hours and hours a day chained like a slave to your computer, making trade after trade after trade, all…day…long. Is that really the life that you’re looking for? Wouldn’t it be better to be in, out, and on with your day?

In fact the slogan “get in, hit your target, get out…like you were never there” is speaking directly to this idea. The problem is that MOST trading strategies require you to watch for indicators that will “predict” when market movement will happen, and also which direction to enter the trade.

Wouldn’t it be easier, and flat-out BETTER, if you already knew exactly when market movement was going to happen, and then how to take advantage of that movement? Couldn’t you significantly reduce your trading risk if you had these three factors in your day trading arsenal? The less time you have to spend executing a winning trading strategy, the more like you will be to maintain your discipline as a Trader. Speaking of…

4. Maintain your discipline. No matter what day trading system or strategy you ultimately decide on, discipline is absolutely 100% necessary for you to become a successful trader. You MUST maintain your discipline as you execute your chosen strategy, and also as you keep working at perfecting it.

Lack of discipline has perhaps ruined more would-be Traders than any other flaw. Even as an experienced Trader, I sometimes find myself growing impatient with my own trading system (even though these strategies that I use develop almost instantly and I’m usually in a trade for less than a minute). And its when I veer off course of these winning trading strategies that I find myself limiting my profits, or even turning winning trades into losing trades.

As a day trader, there is no characteristic more important in your trading practices than the ability to exercise a high level of discipline. And ironically, there is no trading skill that is harder to master than unbending, unyielding discipline. It’s something of a Day Trading paradox. But its also a real trading skill that you MUST master if you are going to ever achieve consistent day trading success.

So there you have it – the four keys of identifying winning trading strategies. Of course, not all trading systems are created equally…and if you’re going to achieve day trading success, it’s on YOUR SHOULDERS to identify those day trading systems and strategies that will give you the greatest chance of success.

13 Extremely Powerful Forex Day Trading Strategies That Take Only 30-60 Minutes Each Day!

Learning forex trading is not rocket science. Many people are making their daily living from trading the forex market. Trading forex is much easier than trading stocks. If you are still looking for ways to succeed at forex trading than you should read this article.

Suppose, you are new to forex trading but are interested in learning it so that you can build your retirement account. As a new forex trader, what you need to do is to practice a lot on your demo account. Many new trader, don’t like to waste time on practicing. This mistake ultimately makes them experience margin calls a number of times.

The best way to learn forex trading is to watch how a pro trades. If you are new, first learn a few strategies and then master them on your demo account. Choose one or two strategies that are best suited to your personality and style. Practice it on your demo account. Triple your demo account twice in a row only then think of trading live.

Now, if you are looking for powerful day trading strategies that can make you many pips but does not require more than 30-60 minutes each day to implement, if, you are that person than go no more. Read this article that gives 13 extremely powerful day trading strategies that do not take more than 30-60 minutes each day.

Day Trading Strategies #1: This set and forget strategy works extremely well on 4 hour and daily charts and each time will make 50+ pips.

Day Trading Strategies #2: This strategy works well early morning to early afternoon. If you are about to go to work, you can make 20-90 pips with this on 15,30 and 60 minutes charts. This strategy is best suited for the London Trading Session.

Day Trading Strategies #3: This is for those who can spare an hour or two in the afternoon. This strategy has the potential to turn your $1,000 into $150,000 in just under 40 trading weeks or something like 10 months. Not bad, for just one hour of work daily.

Day Trading Strategies #4: This works very well for those who are on the go and want to make some easy money. It depends on a laser targeted non emotional trade set up. It can be highly rewarding too.

Day Trading Strategies #5: This strategy suits all lifestyle and can make you more than you can make in a week in just one day.

Day Trading Strategies #6: Suppose, you missed the trade setup for strategy #5, you can use it to reverse the situation.

Day Trading Strategies #7: This trade setup appears once in a while, BUT when it does, you can straight away take your family to a holiday.

Day Trading Strategies #8: This is another easy 30-60 minutes trade that can put 20+ pips per trade in your pocket.

Day Trading Strategies #9: It complements strategy #8.

Day Trading Strategies #10: This powerful strategy can make 100+ pips per trade for you.

Day Trading Strategies #11; This strategy can make 20-700 pips for you.

Whatever, you need to watch these 13 day trading strategies videos. As a trader, your aim should be to make as many pips as possible in as little time as possible and then spend the rest of the day with your family. You are not trading to sit in front of your computer all day for the trade setup and the trading signals. You are trading for making quick money and then using that money to enjoy life.

These videos teach you 13 different ways of doing that. You can choose any one of the strategy that best suits your lifestyle to master on your demo account first. Once you have practiced it on your demo, you can start live trading to make easy pips each time you trade. The importance of first practicing on your demo account cannot be overemphasized. The more you are going to practice these strategies, the more you are going to make winning trades when trading live. Don’t miss watching these trading videos! Watch each video. Each strategy has been described in detail. Then choose the one that best suits you. Master it and start making pips using it on your live account after practicing on your demo account. The more you practice the more you are going to become confident using that strategy! These strategies are not difficult to master. Good Luck!

How to Design a Share Trading Strategy

Before we start:

All Traders should have a mantra, as follows:

I will educate myself on how the market works.

I will learn how to find and place a trade.

I will create a trading plan and trade my plan.

I will not chase the market with emotions.

I will decide to be a day trader or an overnight trader (or longer) before I enter the market to help to control my emotions.

I will be patient and wait for a market set up.

I will never trade without a protective stop loss order.

The market will meet my criteria or I will not trade.

have refined a standard procedure that I use for the process of creating a trading strategy. I always start with the big picture and make increasingly more detailed decisions about the strategy.

I begin with the assessment of what type market action I want to trade and what kind of trader I am. Then I end up with making decisions on exits, and how far away to put my money management stops.

How can you adapt my strategy making to your personal psychology?

You Must Pick the Market

The first decision you must make is what type of market you want to trade. Although this may look like an easy decision, in fact, it is a difficult judgment, because most new traders only consider the profit aspect. They simply try to pick the strategy that they think will make the most money. Focusing on money will probably lead you to make the wrong decision. It is the psychological aspect of trading each of the markets that is the most important consideration. It does not make sense to create a very profitable strategy if you are unable to trade psychologically.

What is Your Trading Time Frame?

You need to decide whether you will day trade or trade on daily or weekly charts. It is very difficult to have a job and trade intra-day. It is not totally impossible, just very difficult.

Most people want to trade part time and still hold down a day job. If you want to do this, it is better to trade daily or weekly charts. You will only be able to look at the market outside of your working hours and your strategy design will have to take this into account.

The strategy should not require you to check the market during the day. I think that there is only a certain amount of money that you can get from the markets and that depends on the time frame you choose to trade.

Time frame choice is a personal decision, and of course there are no right or wrong answers. The ultimate decision is personal preference influenced by financial your considerations. But you have to make this decision before you start looking for indicators, as the choice of indicators is influenced by the time frame selection.

However remember the old saying: “if you ‘buy and hold’ then eventually everything will be fine. Remember the expression touted – “It’s time in the market, not timing the market.”

My guess is that more active investment management will be the key for anyone wanting to make a better-than-inflation return from shares over the next five years.

What I am trying to point out is that short term or day trading in this type of market is better than buy and hold. But it must fit in with your time availability.

The Types of Market

There are three types of market action: trending, directionless and volatile. I think a directionless market is very hard to trade, thus I will not discuss the directionless market here. I would suggest trading either a trending market or a volatility market.

You can choose a trend strategy, knowing that you are going to have to trade through periods of corrections during the directionless phase, or you choose a volatility strategy that will give you extended periods of doing nothing while you wait for the next trade. Which one is for you?

We will look at a volatile market and a trending market and build our strategy accordingly.

What is a Volatile Market?

A volatile market is characterized by sharp jumps in price, up or down. This type of market action involves a quick and unexpected change in volatility. One measure of volatility might be the difference or spread between two moving averages – the spread increases with volatility. Price action, such as gap openings or an increase in the daily range, can also be considered an indication of an increase in volatility.

Each of these two types of markets (Trending and Volatile) are tradable, but with markedly different trading strategies. Let’s take a look at each type of market behavior and the strategies that are appropriate to that type of market.

Strategy: Volatile market

Trades generated by this type of strategy are usually short-term, and when trading this type of strategy, you will be out of the market a significant amount of time.

Volatility strategies generate a high percentage of winning trades, although these trades usually generate small profits per trade. The Foreign Exchange (Forex) market is a typical market that I would class as volatile. Trend following strategies don’t work well in the Forex market.

Today’s market volatility is unprecedented, but so is the market opportunity if you have the right trading methodology. With CFD Trading you don’t have to worry about whether the market goes up, down or sideways as long as it stays within your boundaries. The record volatility has created great value for CFD or day trades, while allowing you to set conservative strike prices.

Whether you are a novice or experienced day trader, you now have the opportunity to learn how to take advantage of today’s chaotic market conditions and target attractive profits.

However you must realise that trading a volatile market, e.g. day trading, is inhabited by the sharpest minds in the game. They are all out to grab your money. The best way to start day trading is slowly, calmly and armed with all the education and the best mentorship you can muster. Look at your market indicators and learn how they interact.

Comparing medium or long term trading with day trading is like comparing a wombat with a kangaroo. Entry points, exit points and risk reward ratios are different. Go slowly when you begin day trading. Preserve your trading capital and most of all, don’t trade without a trading plan.

Let us have a look what indicators I use.

I use volume, 3 moving averages (MA), MACD and stochastic indicator.

Generally, I use a 5 minute chart with the MA set at 18, 39 at 50 periods. The MA18 and 39 are my main ones, while I keep the 50 as my trend indicator. I have also volume, MACD and stochastic on the chart.

When trading CFD, I set my daily range as per my Bias Indicator, as outlined on my web site. Then I look for possible trades on a number of charts in my watch list. I look for trends and volatility.

If the trend is going up, I watch for an opportunity to go long, if the trend is going down, I seek to go short. Always wait for a retracement, watch the MACD and stochastic indicators. In this discussion, I will concentrate on going long, however you can apply the opposite technique to go short.

Let us assume that we have an uptrend and the last few candles show a retracement. Watch your stochastic indicator. If it shows oversold, wait for it to turn up. Also watch your MACD. It should also start to turn up. If possible, candles should show a clear swing low.

A swing low requires at least three periods (bars on a bar chart) to be established. A swing low is formed when a period’s low is lower than both the period before it and the period after it. A swing high is the reverse. It is formed when a period’s high is higher than both the period before and after it. You cannot say that a particular bar on a chart is the lowest the stock will go until the stock experiences a period in which it does not continue to go lower. Therefore, in its simplest definition a swing low is not established until a period occurs in which a stock does not make a new low for the move.

This should establish your entry point to go long.

Exits are somewhat more intuitive, especially once you are in profit. I generally exit when I get a swing high, when the MACD starts to turn down or when the stochastic indicator starts to turn down. I am happy to exit with small profits rather than let them turn into a loss.

Day trading is part mechanical and part intuitive. You have to watch all the time, adjust your trailing stop loss and take profits when you can.

I believe it is one of the toughest ways of trading, but in a volatile market, can also be one of the most profitable.

Now let us explore how to set a strategy for a trending market.

Should we use weekly or daily charts?

Weekly charts are much more difficult to trade because it takes more discipline. To trade weekly charts, you must make your decisions on the weekends and not make any changes until the next weekend. For most traders, this is very difficult to do. It is very easy to yield to temptation and move a stop loss or a money management stop, or want to keep your profits and exit the market early.

Most people don’t think of trading weekly charts. My experience is that when following trend trading, there is a lot of money to be made trading weekly charts, simply because so few traders are able to do so. To make money in the markets, you have to walk where the average traders do not venture. Weekly charts are one of those places. However, whether you us weekly or daily charts, the strategy remains very similar. There is more price detail in the daily chart, but also more price noise.

What is a Set-Up for a Trade?

Let us look at some of the indicators which we could use. For a trending market, trading for the medium or longer term, I prefer to use Exponential Moving Averages (EMA) of 150, 50 and 20 periods. I would like to point out that I rarely enter a trade long if the price is below the 150 day EMA.

The other guide I use is volume. Volume indicates interest by other traders and momentum in the market.

I am sure that most traders have tested the Moving Average Crossover Strategy sometime in their trading career. The average trader will look at this strategy and believe that the only thing to test is if the two or more moving averages cross over.

New traders will experiment with many different lengths for the averages. As I said before, I prefer to use Exponential Moving Averages (EMA) of 150, 50 and 20 periods.

When they don’t find any that work to their satisfaction, they discard the moving average strategy concept entirely and move on to something else. They keep looking for that Holy Grail indicator that they hope can instantly make them successful.

We have all been there and have all discarded many great ideas. The discarding of an idea, more often than not, is a mistake. I believe that for the most part, any indicator can be made into a profitable strategy. Yes, I said any indicator. When we discard the moving averages, it is usually a mistake because the moving averages by themselves only represent one half of the strategy development process.

The second half of a strategy, the half that most traders ignore completely, is what I call the “Entry Point.” I will talk about exactly what these two terms mean and how using them. Together they can turn something as simple as a moving average crossover into a promising new trading technique.

To develop and execute a successful strategy, we need a set-up and an entry signal. The set-up is the set of conditions that are necessary prior to considering taking a position in the market. It consists of the indicator or group of indicators that tell us to get readyto enter the fray. Set-ups don’t get you in the market; they simply make you aware that a trade could be possible.

Here are some examples of a trend following set-up:

A fast moving EMA crossing over a slow moving EMA.

Price moving close to or outside a channel, e.g. Bollinger or Standard deviation channel.

Prices reaching the upper or lower line of a moving average envelope.

Sudden increase in volume.

There are countless other indicators and conditions that could be used as set-ups. In the final analysis, you are limited only by your creativity.

Once we have defined our set-up rules, we can then establish our Entry rules.

Creating Entry Rules

By trading only set-ups, you lose the added accuracy and increased profitability of a strategy that uses both set-up and entry. If trading set-ups by themselves worked and was profitable, trading would be easy and all traders would be rich.

An entry is the signal by which the trader purchases the contract in the market. It is the technique that a trader should use to take a market position once the rules for the setup have been met.

Entry selection is dependent on the type of set-up you’ve designed. The entries must be designed differently depending on the type of strategy you choose to trade.

There are two rules which should be followed to enter a trade.

The first rule requires prices to move in the expected direction before entering the market. If our set-up indicates a long position, we would require the price action to move up in some specified manner before we would be comfortable taking a position. We want the price action to confirm the set-up and force us into taking a position.

For instance, let us assume that on today’s close our set-up has given us a long signal. We might require a breakout above the high of today’s bar to confirm that the market is in bullish mode. With this breakout as a condition of entry, we have now required specific market action in the direction of the set-up before we risk taking a market position.

You may decide to place a buy order if the price is a set number of points above the previous day’s close. It is up to you to decide what your entry point should be, once you have a set up.

The only limit to creating viable entries is your creativity. There are potentially many techniques that make interesting entries.

The second rule requires you to enter the trade if your entry point is met. You should not hesitate to enter.

Trading the set-up and entry concept and making sure that you follow the rules gives far superior results when compared to trading either set-ups or entries by themselves. Using both a set-up and an entry together enhances the performance and profitability of a strategy.

I wish you success with your trading. Please do not hesitate to email questions to me.

It is of benefit to look for a good mentor to help you to keep on the path of learning. If interested, look on my web site where you can find a good (I hope) and affordable mentoring program. I may well be of help to you.

Why Use Option Trading Strategies?

Many opportunity seekers are attracted to options trading as they have heard stories making promises of fast profits. The problem is that these traders come in thinking of nothing more than stuffing their bank accounts full of cash in a short period of time. While this scenario is achievable the odds are certainly going well against you. In most cases achieving big profits in a short time period involves an extremely high risk options trading strategy. The key to your success is finding a reliable strategy and mastering it. It is far better to pull off consistent gains rather than trying to hit a home run. Once you know one strategy, well you can learn others.

Below are some of the options trading strategies that you may consider.

Popular strategies to trade options include:

Bullish on volatility
Bearish on volatility
Selling Credit Spreads
Bearish strategies
Selling Covered Calls
Bullish strategies
Neutral or non-directional strategies
Calendar Straddle
Strangles

The above list is in no way an exhaustive list, there are plenty of other strategies that you may employ. The purpose of this article is to just give you a small taste of some of the possibilities. Below I expand on a few.

Selling Credit Spreads – If you are looking for a strategy that does not involve marrying your stock options career, then this is one you could consider. There is nothing worse than following a strategy that requires you to monitor the market for every minute of the trading day. You can complete what is involved with this strategy in around an hour a week and if done correctly you might be able to increase your portfolio by around 10-15 per cent monthly. They are great returns that really put to shame what the banks are offering. To execute this strategy you need to know how to carry out a trend analysis on the market. Of course the scope of this article does not allow me to cover this further. You are best advised to join the mailing list on this site.

Bullish Strategy – If you are expecting the underlying stock of an option to increase then you could go with this strategy. The Bullish options trading strategies are brought into play when you as the trader expects the underlying stock price to increase in value. You need to consider just how high the stock price is likely to go and within what time frame. The most likely strategy choice for a bullish trader is a simple call buying strategy. This is quite popular with beginners. Other bullish strategies include Covered Straddle, Bull Calendar Spread and The Collar.

Complex Strategies – These include such things as iron condors, butterflies, straddles and strangles. Just where do they come up with the names used in strategies for options trading? Strange aren’t they? The ones I have listed here if followed correctly are generally low risk while at the same time being highly likely to be profitable. The disadvantage is that they are expensive, either due to the fact that you are trading expensive options or thanks to high brokerage fees which come about due to the number of trades involved.

You should remember that options are quite versatile trading instruments. With such great flexibility this is where many people get it wrong. They think that the more complicated an option trading strategy is the more successful it can be. In fact it can be quite the opposite. The more complicated the strategy the more open you could be to risk while at the same time limiting profit potential.

As with any strategy you employ with your options trading business and treat it with respect. Don’t trade live until you have given it a good test using a practice account. Only then should you consider running with it using your real money.

When learning how to trade options it is always advisable to only use risk capital when trading with real money. This means only use money that you can afford to lose if you have trades that go against you. There you go that just touches the surface of options trading strategies. Of course you will want to learn more and then select a strategy to trade your options using a test account. From there who knows?

Always remember to not let things get out of hand. If you are learning a new strategy only trade with one contract at a time. If you go overboard you will soon find yourself out of control and headed towards disaster. Options trading is not a race. You have time on your side and you should make the most of it. The market will still be here tomorrow.

Trading Psychology Lesson – Impulse Trading

In this article we’re going to investigate the concept of good and bad trades.
We’ll note that good trades are a result of making ‘good trading decisions’ but alas may still have ‘bad outcomes’.
Conversely, bad trades are a result of making ‘bad decisions’ and on occasion may actually result in ‘good outcomes’.
The trader’s best weapon in breaking the mould 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 which help identify the best trades to suit particular and personal trading specifications. We have a number of trading strategies which can be used to reap rewards from the stock market, with each strategy using a particular structure or ‘setup’ to formulate a smart trade. Most traders however don’t have such a structure, and as a result, too often 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 Spontaneity

We’ve all been there!

You look at a chart, suddenly see the price move 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 pilot. You might even find yourself staring at a newly opened position thinking “Did I just 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 one which is done outside of this usual method. It is a bad trading decision which 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 too often? Well, unfortunately this occurs all the time – even though these transactions fly in the face of 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 psychology behind it.

In a nutshell, traders often succumb to the impulse trade when they’ve been holding onto bad trades for too long, hoping against all reason that things will ‘come good’. The situation is exacerbated 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 popular belief, 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 because of a bad/impulse trade, nor a trading psychology 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 psychology behind taking an impulse trade is simple: the investor takes a risk because they are driven by fear. There is always fear of 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 a particularly ‘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.

Result of the Impulse Trade

Impulse trades typically end in one of three ways:

The ill-conceived impulse trade results in a loss (odds-on outcome!)
The impulse trade results in a loss, but subsequently becomes the trigger of a valid setup. The trader ignores the setup for the sake of their previous loss and misses out on the next win.
The impulse trade that actually wins. Occasionally an impulse trade will work out in the trader’s favour. This is sheer luck!

From another viewpoint, however, a winning impulse trade is bad luck because it reinforces the taking of a bad trade simply due to a good outcome.

One winning impulse trade will spur on more and under the right market conditions some of these may also have good outcomes. It’s a natural tendency for traders to focus on winning outcomes – regardless of the quality of the decisions which caused them.

This is a particularly dangerous situation for traders as all of their negative trading traits (which would usually cause losses in normal market conditions) are being reinforced.

As one would expect however, more often than not, bad trades made from bad trading decisions will result in losses. When the market eventually ‘rights itself’ and the aberration which allowed some bad trades to have good outcomes disappears, the trader is left confused as to what constitutes a successful approach, and is undoubtedly nursing big losses.

The trader has failed to focus on the quality of the trading decision, but rather than the quality of the outcome. In this way the impulse trade is little more than gambling, because gambling is based on pure chance whereas good trading is based on calculation and reason. There is risk inherent in both trading and gambling, but in the former, risk is accommodated and is simply an expected outcome in an overall proven winning strategy.

One must remember at all times that trading psychology is an incredibly important part of setting up a winning trading career.

If one doesn’t remain calm, a few winning impulse trades are going to be outweighed by the eventual losing impulse trades, and cause a whole bundle of trading psychology issues down the track.

Curing the Impulse Trade Urge

So, how does one know that they’re at risk of an impulse trade, i.e. how does one stop the problem before it develops?

If you’re feeling panicky about your portfolio or a potential trade, that’s the first sign. Stress will push you into the region of ‘unreason’, and you’ll be more susceptible to making a bad, impulse decision.

If you think you might be at risk of making an impulse trade, ask yourself these questions:

Do you feel that you are rushing to get into a trade in case you ‘miss’ it?
Are you basing whether to take this trade or not on a prior trade, either missing that trade or it being a loss?
Do you feel sick or nervous just before, or just after you’ve entered a trade?
Have you focused on making a good trading decision, that is, are you following your trading methodology?

If the answer is ‘yes’ to the first three questions, and ‘no’ to the last question, then you are very likely making an impulse trade.

Don’t panic

As in all trading psychology problems, there is one solution – don’t panic. Of course, quelling panic isn’t easy. Remember that panic comes when a fixation causes a situation to seem direr than it actually is.

The best way to avoid panic and indecision is to always trade based upon a proven trading plan which clearly defines the conditions by which you enter and exit the market, and perhaps more importantly, how much of your capital you are going to risk on each trade.

Any sense of disappointment which comes with a losing trade is therefore the result of adverse conditions in the market for the traders trading system – not the trader. When this is the case, you should not ascribe self-blame and create a massive trading psychology complex.

You have to remember that not all trades will win and that when you lose money using a proven system, you shouldn’t panic. When you’ve lost money on an unstructured, impulse trade however, it is time to start looking at your trading psychology mindset.

In both cases stay away from panic or it will control your next move.

Trading Psychology is a key part of out Workshops. We’ll teach you the common pitfalls which catch out novice traders and give you the mindset to take your trading to the next level.

Carl has delivered presentations on trading and investing to over 20,000 people throughout Australia and New Zealand and has helped countless clients to improve their trading outcomes. He also writes the long running and popular ‘Terms of Trade’ column in the finance section of Melbourne’s Saturday Herald Sun newspaper.

Carl is currently the Head of Education at Australian Stock Report. Carl and his team teach technical analysis, money management, and trading psychology to intimate classes in a live trading environment. These workshops utilise strategies designed to take advantage of trading opportunities on all asset classes including equities, FX, commodities and indices.