Being impulsive is one of the biggest flaws for a forex trader. The currency market is very volatile, and frequent price movements may make us restless. However, we cannot keep up with the constantly fluctuating market by making impulsive trading decisions. You need to be responsive, but jumping to conclusions without careful analysis of the market situation will not bring the desired trading results. In this blog, I will be sharing 3 forex trading tips to avoid impulsive mistakes in the trading process.
- Plan Before You Trade
The relevance of having a well-defined trading plan can never be overstated, as those who enter the currency market without a plan are signing up for failure. In fact, those who are impulsive fall into this category as they often don’t have a plan or have a hard time sticking to their plan. Your trading plan should be like a route map that takes you to your destination through the right path. There are so many ways through which you can navigate the dynamic forex market, but finding the right one is the key to success, like choosing the most suitable currency pairs, trading sessions and strategies.
While you are devising a trading plan, you need to be clear about your trading methodology, trading style, timeframe and method for analysis, trade triggers, entry point, exit point, position sizing based on the risk per trade, leverage used and required margin for executing these trades. Meeting the margin requirement is essential to keep the trades running. You can depend on a margin calculator to estimate the margin level to be maintained based on your lot size, leverage and trading instrument.
The planning phase is just as important as execution, as any shortcomings in the plan will make the trading process harder, and this leads to disappointing results. One way to ensure the viability of your strategy is backtesting with historical market data. When you backtest your strategy, you will get to see the results and work on improving your plan based on how the trades turned out in past market situations. You should also test your trading plan on a demo account to see how it will perform in the current market situation.
A trading plan needs to be specific, covering all details that are relevant for making trading decisions. There should not be any ambiguity as one has to make quick decisions in the fast-moving market, but being quick does not mean being impulsive. Being quick is about making timely decisions before the opportunity passes. Having analytical skills is also important to find the ideal trade setups that are in line with your strategy.
Many traders abandon their strategies, thinking they will get better results by going in a different direction. But this approach is very risky in the forex market as moving without a plan will leave you confused and overwhelmed. Strategies like news trading are rewarding when there is a plan in place, but when you don’t have it, you will just get caught up in the sudden volatility. Hence, planning ahead and having backup plans are essential to avoid impulsive mistakes in trading.
- Follow a Disciplined Approach
The second tip can be connected with the first one, as discipline makes us stay true to our plan and not break the rules we have set for ourselves. Discipline also motivates us to keep working towards our goals even when things don’t go as planned or when we are facing any challenges during our trading journey. Consistency cannot be attained without discipline; consistency is essential to becoming a successful forex trader.
Starting to trade and making profits is hard for a beginner, but once you reach that level, retaining this profitability and success is even harder. Even experienced traders fail to remain successful in the long run as they make poor decisions under the influence of emotions, leading to their downfall. In the forex market, you cannot afford to act recklessly and taking excess risk due to greed or overconfidence will be a grave mistake, in my opinion, because risk management is essential for survival.
The reason for many traders struggling to build trading discipline is that they don’t have long-term objectives. They enter the market to make quick profits and are not willing to wait for a longer duration. They are not ready to put in time and effort to attain their goals and often have unrealistic expectations fueled by misconceptions and myths. The root cause behind all this is a lack of knowledge and research. Hence, you must spare some time to gather relevant information from reliable sources.
Another thing to do here is to be rational and logical throughout the trading process. Precision is a prerequisite for trading success, and you can use online trading tools to ensure accuracy in all trade-related calculations. Calculating the risk and potential profits will keep you on the right track, as knowing the probable outcome of a trade will stop you from making impulsive mistakes. But this is easier said than done, especially when you always second-guess your own choices.
Practising emotional control is also important for following a disciplined approach, as those who give in to their urges will never be able to remain disciplined in the long run. Those who exit the trades before the stop loss is hit are impulsive due to fear, and the same applies to those who exit their winning trades early as they are afraid of losing their profits. Hence, having control over your own emotions is important to get control over your trading activities.
- Work in 24-Hour Blocks
Another reason for traders becoming impulsive is working with shorter timeframes, as they demand you to make quick decisions and take action, which often leads to impulsive decisions. The fear of missing an opportunity does not allow you to take the time to process things before arriving at a conclusion. Hence, the solution to this problem is working with longer time frames, such as daily or weekly charts. Working in 24-hour blocks will give you more time to analyse the market situation, as there is no need to rush.
You can afford to take your time, and slowing down is actually beneficial as it gives you more clarity about what is happening around you. You get a clear picture of the market scenario, and with all this information, you will be in a better position to make sound trading decisions. When you are forced to make quick decisions, you don’t analyse the situation or fail to see it from different perspectives to explore different options or possibilities.
But when you are treating each day as a new block of time, you have enough time to do all this and choose the best course of action. When you are in a hurry, logic and reasoning, take the back seat, and we instead look for the most convenient option based on our intuition or gut feeling. This is not how traders should make a decision, as the market will never favour us until we learn to move with the market instead of expecting the market to move in our favour.
Longer time frames are easier to work with when you are a beginner, giving you the freedom to leave the screen for a while and take a breather. Because there is no need to keep your eyes glued to the screen, unlike in the case of shorter timeframes. Shorter time frames are for scalpers and day traders who are skilled enough to deal with the fluctuations that happen quickly and make profits from them.
But those who are not sure about executing these short-term strategies well should try to swing trading or position trading as they are easier in comparison. The overnight risk is there, but you are less likely to make impulsive mistakes or develop a habit of overtrading while following these trading styles. They are also suitable for part-time traders who are still getting ready to get into full-time trading.
So, these are the three tips that you can follow to avoid impulsive mistakes as a forex trader. Having a plan and being disciplined enough to keep moving as per the plan is the key to avoiding any type of trading pitfalls as a beginner. Those who fail to do this will see themselves repeating the same mistakes over and over again, which makes them stay stuck in the same pattern without any progress.
Working in 24-hour blocks with longer timeframes is another thing to do to avoid impulsive trading, as shorter time frames put us at the risk of making wrong decisions in the moment of an impulse. But we are less likely to do that while trading with longer time frames, so beginners are advised to do this.