How to Develop Discipline to Stop Impulsive Trading

I don’t know what happened to me. I had been doing so well – I was on fire. Then I took a couple of losses and a need to get my money back seized me. I lost control and my trading rules flew out the window. I wanted to make things happen, but I got creamed and took some drawdowns that I should never have been sucked into. I know better than this, but in the heat of the moment, I can’t seem to help myself.”

Willpower Is Never Enough

Whether its revenge trading, over trading, over confidence, or chasing trades, many traders experience a world of hurt when discipline fails and impulsivity short circuits the rational trading mind.  How many times have you declared, “I’m going to be a disciplined trader and trade my plan?” – only to be ambushed by impulsivity again and again.  If you are like most traders with an impulse tendency, this has happened more times than you can count. 

Why is chasing trades such a difficult behavior to break?  You would think that experiencing the pain of drawdowns would be more than enough motivation to stop impulsivity in its tracks, but it’s not.  And if willpower alone could stop the bleeding caused by an impulsive mindset, then the problem would have disappeared long ago.  But for many traders, that is not the case. 

The problem is a complex mixture of both biology and psychology.  It starts with your unexamined beliefs about work and action.  A trader’s notions about work will drive how they trade, for better or worse. Let’s first examine how impulsivity and work are interlinked.  How many times have you started the trade day with thoughts like these, “Okay, it’s time to get to work, it’s trading time – it’s time to make something happen.” ?   After all, you have got to be doing something, working, if you are trading – right?  You cannot just sit there and expect things to happen.  You’ve got to do something to make money.

Wrong.  The very urgency to act, to make things happen, that probably afforded you success in business or corporate life becomes the destructive basis of chasing trades in the brave new world of trading.  In your work life before trading, being in charge and in control was such a strong way of proving your mettle and of proving yourself a winner that it became ingrained as a habit that you did not question.  When you encountered uncertainty, you forced your will and made things happen.  Many a self-made man or woman owe their success to this notion of work as doing.

This very bias to act sooner rather than later is the basis for chasing the trade.  With the bias to act already in place, the trader’s mind is fooled into believing he is seeing solid set-ups where a rational mind would not see set-ups that are worthy of the risk.  The bias to act (chase) produces an over-eager trading mind that sees acceptable trades where a seasoned trader would see none. 

The successful trading mind has to be retooled from the "success mind" that the trader brought into trading.  The mind that produced success in other endeavors ( a bias to act and get things done)is simply not the mind that produces success in trading.  Success in trading is built upon the learned bias to be patient.  Instead of going and getting the trade, the experienced trader waits for the trade to come to him.  Patience becomes the driver of success – not "doing".  And the quickest path to trading success is the development of patience as a skill.  The successful trader practices patience as he trades, even if it is not natural to him.  And he regulates the bias to act on impulse because he has learned that this urgency clouds his trading mind, and he no longer has the patience to think clearly.  This usually is a learned process because it does not come naturally.

The Biological Motivation to Chase will Set Up the Trader to Act Impulsively

Have you ever experienced the “rush” traders get when they jump into a trade expecting to win?  It feels good, powerful, and confident.  Everybody wants to feel this way.  But it’s dangerous.  How can something that feels so good be sobad for you?   In many other areas of your life, this is the signal that you are in control and in charge of your destiny.  But not in trading.

That “rush” that feels so good is a chemical cocktail composed of testosterone and dopamine.  The testosterone has you believing you can control (by sheer will power and momentum) the outcome of the action you are taking. (In this case, a trade).  The dopamine has you feeling good and confident and powerful.  It also causes you to distort risk.  In hunting game and in battle, you truly need to believe you are invincible and will prevail.  And that is what this chemistry of the mind is all about. 

It is not a mental chemistry of managing risk.  It is a chemistry of being in control of risk.  In trading, it is called over-confidence or irrational exuberance.  The thrill of conquering, of prevailing against all odds, has been a good adaptation for the survival of the human species, but not for achieving success in trading.  Historically, if the human lost the battle, then his life was gone.  It makes sense to believe in your capacity to prevail in cases like this.  But the trader wants to live to trade another day. 

What does this look like in trading?  Let’s look at revenge trading.  You take a couple of losses.  The first one you took just as an everyday hit that every trader learns to take as part of the game.  Then the second and third ring your bell.  “I’ve got to get back what I’ve lost.  I’m going to get revenge.”  In the midst of this danger, testosterone for the courage to fight and dopamine for the confidence that  you WILL win, pulse through your veins and get to the thinking brain.

Now you’re in a fight that you haveto win.  A surge of energy catapults you into action.  You are going to beat the enemy and take back your ground.  You are going to prevail.  Clouded by reactive thinking, you sink deeper and deeper until you are fried.  There is no enemy that you can see.  The evolutionary brain and mind were fighting a war with a phantom menace.   Your mind has conjured up the entire battle.  There is no enemy.  There are only the beliefs that you bring to the management of uncertainty.

The impulse chemistry was seductive and powerful.  It made you believe you could win in that moment.   Yet the rules of trading are contrary to the rules of biological survival.  In trading the rules are built around probability and applying a consistent standard method to manage both loss and reward.  In the brain you brought from the past, losing was equated with biological threat.  Probability was not an environmental pressure that shaped your reactive responses to stress.

The Messy Part of Impulsive Trading – Personal Psychology

We have examined how past performance and biology greatly influence impulsive forms of trading, but what is going on in the psychology of the trader that keeps him locked into destructive impulsive patterns in trading?  In over-trading, the thrill of the chase overcomes your good sense and produces disastrous trading performances.  In revenge-trading, the motivation is to get back what has been taken from you.  What’s the common denominator that hijacks a rational mind and produces impulsive trading?

It is the failure and the meaning of that failure that counts more than the pain of loss.  Logically, it seems that if you feel pain, you would stop the behavior that is causing the pain – the drawdowns caused by over-trading and revenge-trading.  But that is not the way it works in the complicated psychology of performance.   

The trader sees the failure or loss as personal inadequacy.  He or she takes it personally, as if the performance resulting in the loss was, in fact, a reflection of the trader’s inadequacy, mattering, worth, or powerlessness.  And avoidance of seeing yourself as bad or flawed is far worse than the pain of a single loss.  In that avoidance the trader has to prove himself by winning.   Reacting to perceived threat, the trader has to prove himself and instinctively reacts in anger (a sense of power) to take back what is his.  The problem is that anger mixed with fear is driving the thinking of the trader now.  Clear thinking has been thrown out of the trading mind until he regains his senses (after the smoke clears from the fire fight).

In over-trading, the trader feels the thrill of winning (of proving how powerful or adequate he is), which creates a chemistry of irrational exuberance that leads to minimizing the potential of risk driven by a belief that the good times are going to roll on forever.  By ignoring the pain, the trader jumps in again and again without first soothing the pain of loss.&nnbsp; This starts the avalanche called revenge and over trading.

It is the psychological vulnerability experienced by the exposure to uncertainty that causes the avalanche to become dangerous.  It is the trader’s myth of control over outcome, so important to the trader’s untrained psyche, that is busted.  And it is this belief structure that has to change for the trader to evolve to a higher level of trading performance.

Only after all the magical thinking about success in trading has proven useless can the trading mind really be built.  It is rare for someone to come into trading with a mind that is suitable for trading.  Most fail at trading because they realize way too late that they have to become the change they want to see in their trading.  Or as an experienced trader once said, “You can fool yourself, but you can’t fool your trading account into fooling itself.”  Your trading account will show you where to look for the problems in your trading and where you need work. 

It is possible to retool the mind specially for trading success if you are willing to listen to your trading account as it speaks to you about the pain of loss.  This is the beginning of the end of impulse trading in whatever form it takes.  You train yourself to separate your personal worth from your performances.  This is the great psychological leap that has to be made to move from impulse trading to patient trading.

In the process your understanding of work as "doing" something transforms to the work of patience – waiting for the market to give you what it is willing to give.  And for the mature trader – that is enough.  More than enough.

To learn more from Rande, be sure to check out some of his other articles at