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Many traders struggle with making impulsive trades. For some reason, we can create the best and most carefully crafted trading plan, review the patterns we intend to trade, and resolve ourselves to doing everything correctly—but then we discover that half the trades we execute don’t fit into the plan!

For many traders, simply eliminating these “out of plan” trades can be the difference between making and losing money, but this is often surprisingly hard to do.

Why do impulsive trades tend to be such bad trades? It might seem they should be a coin flip, but most traders find that they are quite consistently losing trades… except for the occasional big winner that reinforces (with random reinforcement!) the urge to place these trades.

I think these trades are so damaging is because they encapsulate the worst of human emotion—all the fear of both losing and missing out, the desperate hope for quick gains, anger, recklessness—all the worst. You can be pretty sure that impulsive trades will take away from your bottom line.

Here are five concrete ideas for stopping these trades and taking control of your own trading. None of these are a quick fix, but apply them consistently and you just might transform your results.

  1. Commit to a review and scoring system where you periodically (end of day for daytraders, end of week for swing traders, maybe end of quarter for long-term investors) review all of your trades and give them a 1 or a 0 based solely on one criteria: was it a trade fully justified by your trading plan?
  2. Create consequences, and those consequences should be painful. If you’ve done the review, you know how many trades don’t fit into your plan, but that’s just a first step. Perhaps you miss a day (for a daytrader) or a week trading—just take the time off and allow yourself to place NO trades during that time. Perhaps you donate a significant amount of money (not $1) to a charity that runs completely against your beliefs and standards. Create accountability and consequences.
  3. Understand why you’re making these trades. Is it boredom? Fear of missing out? Anger at previous losses? Trying to fight back to breakeven? Are there certain trading situations (e.g., after a string of losses) or market environments (high volatility or maybe the opposite, flat and dead markets) that cause you to make more of these trades? As you work to understand your motivations, seek a positive reason that is having a negative impact. We very rarely make mistakes for simple reasons like “I’m stupid and a bad trader”. Usually it’s a positive trait that is expressing itself in a detrimental way: competitiveness turning into rashness, for instance. Understanding why you’re doing something can be an important step in changing your behavior.
  4. Catch the trade before you make it and stop yourself. Once you realize the negative impact these impulsive trades have on your results, you might be able to just ask yourself “is this a ‘real’ trade justified by the plan, or am I forcing a trade?’ before each trade. Many people who think they struggle with this problem haven’t actually resolved to solve the problem; it’s worth deciding you are going to stop these trades and see if just thinking before you push the button can make a difference. Sometimes the simplest solution is the best!
  5. Create a physical checklist that you use before each trade, and one of the items on that list is “trade is in trading plan.” I will write a lot more about checklists in the future, but just having a consistent list you use as part of your process can break the cycle of impulsiveness. I’ve watched daytraders getting ready to make an impulsive trade, almost push the button, remember that they have to go through the checklist, ponder the list for a few seconds, and then back away from making a bad trade. Don’t underestimate the power of the written checklist.