Today we are going to discuss how price action trading rules can help curb impulse trading. Most traders lose money trading for the simple reason that they don’t know how to read a price chart, and thus their trading is nothing more than gambling. However, what about those traders that have been trading for long periods of time that have a solid trading plan: Why do those traders still lose money? If you are a seasoned trader that is still losing money, then most likely you are losing money because of impulse trading. You enter too late into a move that caught your eye only for the simple fact that prices started moving and you watched it go without you, so you want to enter too and no sooner than you do enter, prices are backing up again and going against you. This is what we describe as “impulse” trading,” or trading on a whim for fear of missing the next big move.
It takes discipline to be a good trader, and impulse trading traps more unsuspecting traders on the wrong side of a trade more times than most traders care to admit. I must admit that if I let my guard down for even a second, I can get caught up in impulse trading myself, and I know better, so understand that it can and does happen to the most seasoned and experienced traders if they are not on top of their game. We could write for days about impulse trading, which is really nothing but your own personal emotions interfering with your trade decisions. Rather than re-invent the trading wheel, we will share with you a recent article that we found at www.tradersstateofmind.com. This article does a great job of describing impulse trading, so enjoy this small excerpt that we added. Here is what the article had to say.
The “Fear of Missing Out” drives many of the fear and impulse-based problems that traders experience in the performance of trading. But what does it look like? In what areas of trading performance does it manifest?
Have you ever seen a set up that looked too good to pass up and you grabbed it impulsively before it could get away, even though it was not in your trading plan? Have you even been seized by hesitation, looking for more and more confirmation before entry and felt the pressure of opportunity building up to act until you jumped in the trade just to get out of the discomfort? Or, have you ever been in a trade, got unnerved by the initial flux, and gotten out of the trade with only a small profit before anything else could go wrong, and the trade went on to your target?
Fear of Missing Out as Greed
These are the primary faces of the “Fear of Missing Out”. Notice that this particular fear can show up in the form of fear or greed or a combination of both. In the first scenario greed drives the “fear of missing out”. The trader sees opportunity arise outside of the parameters allowed by his trade plan. The greed to seize opportunity (or the desire to acquire) hijacks the trader’s discipline and impartiality.
This is seen in over-trading, impulse trading, and revenge trading. When discipline slips, the “desire to acquire” motivation trumps clear-headed thinking. Greed, as a driver of motivation, has its origins back in our evolutionary history. It is neither good nor bad. It is simply an emotion that evolved over the eons to help us survive, and then it became instinctual. In the times before agriculture, no one knew from where or when his next meal was coming. So when the opportunity arose, survival dictated that you take advantage of a situation – whether you were hungry or not. Taking more than you needed, even at the expense of others, helped ensure survival in leaner times. So it became wired into our biological repertoire.
This survival strategy was embedded long before man had developed a psychology as we understand it today. Greed evolved into a survival strategy as an opportunistic way of taking advantage of circumstance. In a breakdown in the learned discipline required of trading, greed (in the form of the “fear of missing out”) can trigger and take the trader out of the impartiality so necessary for consistently successful trading. Without emotional state management skills, a trader will continue to have his trading mind hijacked by primitive impulses rooted in survival.
Does this article ring a bell or sound familiar to you? My guess is that it does, because it sounds familiar to me too! This is where our price action trading rules can come into play and help your trading results. First of all, if you are proficient in reading a price chart, then you will have a much better understanding of what prices are doing as they print to your trading chart, so that fact alone will help you in curbing your impulse trading habits. However, because our rules only allow us to buy low or sell high, without being a counter trend trader, it makes it almost impossible to trade on emotions unless we blatantly break our trading rules. Most trading strategies leave you a bit of wiggle room for breaking your trading rules, or else they are so rigid that they won’t work anyway.
Price action trading rules leave you a lot of room for critical thinking and decision making too, but because you have a better understanding of prices and what the chart is telling you, you will make fewer mistakes when trading. If you are a consistently profitable day trader, or if you know someone that is a consistently profitable trader, then I can almost assure you that they know how to read a price chart, and they actually understand what is going on as prices print to their chart.
Almost certainly, many of our price action trading rules will be in direct opposition to your normal trading rules, and that’s why price action trading will better serve you as you learn the language of prices. As one small example, I can search the Internet right now and find a multitude of break out trading strategies that will swear that they make money, when more times than not, fading (fading is taking an entry in the opposite direction of the break out) a break out will be the better trade. When trading breakouts, you are buying high and selling low, which is not a great idea in the majority of cases when trading. A trade entry in the direction of the break out is normally only a valid entry on a retest of the breakout area if prices actually pull back and test the breakout area, and then begin to move in the direction of the breakout once again. This is what we call a breakout pullback entry, and it’s the only way we will enter a trade on a break out of strong support or resistance. Yes, we miss a strong move on occasion with this rule, but that type of move will only happen rarely, so attempting to do it will simply lead to a losing trade set up in the majority of cases.
Regardless of how long you have been trading, if you spend the time and effort to learn price action, our price action trading rules can help curb impulse trading habits. If you are interested in learning how to read a price chart like a pro, you can find our price action trading manual at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.