Impulsive Foreign Exchange Trading vs. Logical Foreign Exchange Trading
Many experienced foreign exchange traders will tell you that more forex trading losses are incurred via impulse trading than a disadvantageous error in judgement. This conclusion has been reached after studying the two different types of traders on the forex market – the impulsive trader and the logical trader. The impulsive trader is more likely to produce trading losses than their logical trader counterparts. This is due to the impulsive traders acting on gut instinct and urges of the moment, which the logical trader uses analysed data.
Many individuals compare the high-speed forex market to a Las Vegas casino as it draws new traders to currency exchange. However, it is vital one understands all aspects of forex trading and the different types of traders before entering the ” money casino”.
Impulsive foreign exchange trading
New traders are often told that foreign exchange trading is not gambling. While one is positioning money in a trade with the chance of losing it does not mean a trader can gamble it away. This logical reasoning is particularly evident among the logical traders who often produce more profitable trading results. Conversely, the impulsive traders incur negative results with highly damaging loses in certain cases.
Many new traders feel that if this is the situation why do traders still rely on gut feelings to trade? The reason is that impulsive trading is based on impatient personalities and once these impatient traders hit a winning or losing streak they will trade high stakes until damaging losses are incurred. A logical trader would know when to stop or cut his losses.
The impulsive trader
The impulsive trader can be defined as an individual who will trade based on gut instinct. They rarely use analysis to determine the markets movements and trade on which way they guess the market will be moving. For example, if an impulsive trader saw the USD/GBP currency pairing increasing in value he may feel it has reached its highest peak and will soon begin to fall. The trader will open a trade in anticipation for the pending fall. However, the pair rallies may cause the trader to build on his position based on nothing more than a feeling; and as the currency pairing continues to trend the trader has a margin call on his account. A few hours later the trader may notice that the pairing is falling but he no longer has the original open position.
Although the idea behind the illustrated trade was sound – that the USD/GBP pairing was overbought and would fall – there was no logical backing to identify an appropriate entry point. This is potentially the greatest difficulty impulsive traders’ face. By not employing technical analysis to find entry points they are unable to identify the ideal time to enter a trade and will often enter far too early.
The logical trader
If a logical trader were to see the illustrated example of the USD/GBP currency pairing, he would look to technical and fundamental analysis to determine whether or not to open a position. The logical trader feels more secure conducting trades based on deconstructed data. Unlike the impulsive trader, the logical trader learns from his losses and errors in judgement allowing them to improve his trading strategy.
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