This article covers the factors related to impulsive FX trading.
Many traders have lost most of their money by trading impulsively online. This is not an uncommon event in the FX trading market as traders are sucked into the momentum on their trading platform. The flashing quotes and regular news stream is sufficient to prompt a trader to throw caution to the wind. It is similar to a gambling casino with all the flashing lights drawing you into its realm. This pushes traders to act on impulse and eventually leads to their loss.
FX trading excites individuals, particularly if they are winning their trades. What they are often blissfully unaware of is that they could lose all their winnings in one bad move. This is when FX trading can be compared to gambling as it pushes you to keep trading because you are on a winning streak and think you are invincible. This market has a saying that states ‘logic always wins and impulse always kills’. This does not imply that logic is always more precise than impulse. It means that traders who use a logical method to trade do so by placing limits on the amounts they are willing to lose. The impulsive traders normally do not have limits, or they choose to ignore their limits.
Impulsive FX Trading
Impulsive traders believe that they get a ‘feel’ for the movements in price and use that to place trades. For this example, imagine that the currency values for the EUR/USD have moved rapidly upward. The impulsive trader will get a ‘feeling’ that he should go short with his currency pair as there is a reversal in the offing. As the price continues its upward climb, the trader is convinced that it has been overbought and he makes the decision to sell off more of the pair. The prices stall and do not return. This trader is now convinced that it has reached its top level. He decides to take a treble on his positions and sits back in horror as he watches the pair go higher and he has to enter a margin take on his account. A few hours later, the pair tops out and collapses. This trader has to watch the pair sell off. This is not an indication that his trade was incorrect. He made the right decision regarding the direction, but his choices were based on impulse, not logic.
Let’s imagine the same scenario with the currency pair, but this trader has done analysis to determine his entry points. He has the exact same feeling regarding the overvaluation of the pair. Instead of choosing a turning point based on his ‘feelings’, he will wait until he receives an indication before entering a trade. The logical stop he uses is a swing high. This gives him the opportunity to quantify his risk levels. He has sized his positions to take account of the 2% loss limit in the event that his trade goes under. Even if he had made the wrong moves, the method in which he approached his trade will allow him to preserve the capital in his account for another trade.
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