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Trader’s Drug of Choice
Why do we trade?
We like to make money.
We like to beat the market.
We like to play in the biggest economic arena in the world.
But let’s be honest…
We trade because we like the action. We like the volatility, the chaos the pure bedlam that hits the market when an unexpected piece of news appears on the screen and prices start to tumble like a stack of dominoes.
No forex trader ever said, “Wow did you see that 10 pip range in GBPUSD during the Asia session? That was really something!”
We love the speed.
But speed kills in so many ways.
I’ve already discussed the way speed kills through excessive leverage. Almost every retail trader I know (except those in my chat room) trade on way too much leverage. I’ve even created a risk calculator to help you determine how much you should bet on each trade so that you never lose more than 1% in a day. Feel free to check it out here.
But speed kills in another way, and no matter how careful we are with our size we are all highly vulnerable to this other force simply because we are human. When price moves fast in one direction -- what’s our first instinct?
To chase the move.
We can’t help it. We are programmed to react. FOMO -- the fear of missing out -- has been with us from the caveman days. Chasing price is almost always a sucker bet. Yet we all fall for it because chasing is the trader’s drug of choice.
Occasionally, chasing price works. The move is so huge we sometimes get lucky and get swept up in the wave. But luck is not a strategy. Successful trading is a game of playing the rules, not the exceptions. For every chase win, there are usually five losses as we get stopped out in the inevitable retrace.
The key to avoiding the chase impulse is to have an intelligent, well thought out structure that helps you enter the move SLOWLY -- away from the sentiment extreme. Recently, I modified one of our day trading strategies using the RSI indicator and the 1-minute chart to stop me from chasing price. It’s been working remarkably well. But the specifics of the setup are less important than the setup itself. You need a plan ahead of time. You simply can’t react blindly to every news bomb that hits the screen, because that’s exactly how every trader gets in trouble.
Trading is immensely fun, but chasing is incredibly stupid. Don’t let it be your drug of choice. Your account will thank you forever.