Impulse Trading

We’ve all heard of the following sentence: Trade like a Sniper, not a Machine Gun. It makes so much sense, yet so many traders still give in to their impulses and despite their best efforts they seem to autopilot onto a scatter gun approach. What causes this and how can one overcome it?

What we are essentially referring to above is impulse trading. In Psychology, acting impulsively is defined as a personality trait that leads you to acting on your impulses rather than carefully thinking through your actions and assessing the consequences of those actions should you follow through. If you are a machine gunner, you objective is to mow down the enemy at speed. You do not care where each individual bullet goes, you just fire as quick as you can on impulse, to try and achieve your aim. Compare this to a sniper, who is cold and calculated. Every shot he takes is meticulously planned. He calculates the distance, the elevation or drop, the wind speed etc. He has a complete plan, and he aims to make every bullet count.

Many traders who are challenged with impulse Trading will always view it as a problem solely attributable to Trading. However I can virtually guarantee you that if are showing certain behaviour traits on screen, then these same traits will be present elsewhere in your life. They may not be completely obvious, perhaps they are only present in a subtle way, but I guarantee you they will be there. So the first step in trying to overcome impulsive behaviour is to try and ascertain where else in your life you are exhibiting it. The reason this is so important, is that if you have an issue that you are currently facing, you can only really deal with it if you are fully aware of it.

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Another step to take is train yourself to be in the present moment. To be successful in trading you cannot make decisions based on what you have achieved in the past, or what you wish to achieve in the future. You need to make decisions based on what is happening right now. A big cause of impulse trading is when the focus switches away from process and onto the ‘reward’. Usually this is also on the back of a loss, thus emotions tend to be heightened for many. When this happens you are not thinking calmly, rationally and in the moment but rather you are thinking in the past or in the future. Meditation and Mindfulness are wonderful tools to help you with this, and to find out more please see the linked articles. After my morning meditation, an exercise I do daily is every hour I am at my desk I set a buzzer to ring on my PC. When the buzzer sounds, I take 60 seconds just to close my eyes, and focus on breath and the sensations I feel. That’s it. Once I’ve done this, I carry on as normal. It’s such a short period of time, but it’s an invaluable exercise that immediately brings me back to the present moment.

It can also be helpful to take a view of your performance and your issues as a 3rd party would. Take a pen and paper, find a quiet space and at the top of your paper write what the problem is. Describe when it occurs and how it affects you, both from an emotional standpoint and from a trading and monetary standpoint. Next you want to focus in on how you can overcome or mitigate the issue. Now if you are unsure directly, then come at it from an indirect point of view. Imagine you are someone who is successful and at the top of their field. Let’s say Paul Tudor Jones. Ask yourself “If Paul Tudor Jones had this issue, what would he be currently doing?” Write down what comes to mind. Don’t question it, just put it down on paper. Once you have exhausted yourself of ideas, go back to the top of the page and work through them one by one.

Needless to say, it is important to understand WHY you fall into the trap of impulse trading. Are you making the trades out of boredom? Or could it be perhaps that it is because you have previously had losing trades and you are angry or upset? Are you worried about making back your losses quickly and get back to breakeven? Does it happen to you more in volatile markets or more in quiet markets? It is important to try and gain some clarity in understanding why you are exhibiting certain behaviours and why they happen. Dr Van Tharp famously says “you do not trade your markets, you trade your beliefs. So ask questions of yourself and try to ascertain what are your inherant underlying beliefs. Do not be self deprecating or overly critical in this exercise. If you ask yourself negative, poor quality questions, you are only going to get negative, poor quality answers. View it from the point of view of trying to get better and improve, ask yourself positive questions, and you will get much more useful and constructive answers.

Whilst you are doing this self reflection and trying to find answers, it is important that you apply some deterrents and consequences to any negative behaviours that you still may display. For instance, if you find yourself falling into a negative pattern, simply turn your PC off and do not trade for the next 24 hours. This gives you time to back away and calm down, before you can do any significant damage. You could also donate some money (it has to be an amount that is enough to annoy you!) to a cause that you do not agree with., whatever that may be. Another may be to run all your trades past your wife/husband/parent/sibling at the end of each day to give you some level of accountability. Find something that is effective for you.

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We are currently running a 20 books in 20 weeks book challenge, taking us up to the Christmas holidays. We would love for you to join in! Success in Trading and anything else is always about finding ways in which you can improve and move forward, and reading books is one of the oldest and most effective ways to deepen our knowledge.

To find out more see our article on the challenge here.

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God bless, and happy trading!

TTP

2 thoughts on “Impulse Trading

  1. Hi, TTP

    Excelent article! I really like the soft way you put the things and liked a lot the last tip, having some accountability with a family person.

    Great job!

    Liked by 1 person

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