The Impulsive Trader
We are all familiar with the stereotype of the impulsive
trader. Traders who are impulsively looking for trading
thrills, while telling themselves they are doing it to
make a profit.
The rush of adrenalin that comes from making the "big" trade and then watching
to see if it is followed by a "big" win.
It is not so different from betting at the race track. It is far removed from
what is required for successful market timing.
Impulsive market timers take trades because of emotional responses to news
events, market rallies, or market sell offs, because they "feel" they know
what is going to happen next in the markets.
They take trades not because the trade is required, but for the thrill of the
trade itself. All risk controls are ignored, no logical trading strategy is
followed, and no exit strategy is prepared ahead of time.
Of course anyone can act impulsively at times. But in the investing world,
impulsive trades are almost always losing trades. Impulsive trading has led
to the outright ruin of many traders.
An interesting test was once run to measure a person's impulsive tendencies:
Participants were asked to decide between taking an immediate, small monetary
reward (that is, $100 right now) or a larger reward given later, $500 in six
investing world, impulsive trades are almost always
losing trades. And compulsive impulsive trading,
can lead to outright ruin."
Impulsive people tended to take the smaller, immediate
reward. They have difficulty delaying gratification. They
can't wait for the larger reward. They want what they can
get as soon as possible.
Even disciplined people can act impulsively when the conditions are right.
There is little harm in impulsively going for a latte
instead of your usual morning coffee, black with two equals.
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Yet while some impulsive decisions may have little effect
on one's life, impulsive decisions made when trading
the stock market can have major negative consequences.
Market timing, and all successful trading for that matter, requires that investors
clamp down on emotional impulsive behavior. Market timing is possibly "the" perfect
example of unemotional, non-impulsive and non-compulsive planning. Timers look
far ahead in time, planning for gains that may not be realized for months. If
in cash during a bear market, actual profits may be postponed years.
Instant gratification is the exact opposite of what market timers must expect.
Those who think that long term buy-and-hold investors hold the edge in long term
planning are not correct. It is market timers, following a plan that takes years
to unfold but offering gains far in excess of a simple buy-and-hold, who have
the real long term strategy.
Impulsive traders will have great difficulty being successful (profitable) market
timers. Market timing is the non-impulsive execution of a planned strategy, that
can only be successful over time.
Market timing requires adherence to a trading strategy that requires trading
not when you feel the urge, but only at specific points in time when your trading
strategy tells you to do so. And, those times are often in direct conflict with
the prevailing market sentiment.
Impulsive personalities face many difficulties. But in investing, be sure to
hold those impulses at bay if you want to successfully beat the markets.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.