Direct from the desk of Dane Williams.
Chasing a forex trade refers to the act of entering or extending a position based on emotions or impulses rather than your well planned strategy.
Understanding the concept of chasing a forex trade is paramount if you’re going to have any sort of long term success.
The act of chasing a forex trade involves making a decision based on emotions or impulses rather than your thoroughly tested trading strategy.
It's a phenomenon driven by the fear of missing out (FOMO) or the desire to recover losses quickly.
Recognising when you’re chasing a trade is crucial as it can have significant implications for whether you make money or not.
When you chase trades, you will likely have deviated from your original plan, leading to increased risk exposure and ultimately the type of losses you just can’t be taking.
The consequences of chasing trades in the forex market can be severe, including emotional stress, account setbacks and a negative impact on your overall performance as a growing trader.
Therefore, acknowledging the dangers of chasing trades is essential for maintaining the discipline required to become a consistently profitable forex trader.
The definition of chasing a forex trade
As I said above, chasing a forex trade entails entering or extending a position in the forex market based on emotional impulses rather than your strategy.
It's characterised by a departure from rational decision making, often driven by psychological factors such as fear, greed, or the need for instant gratification.
Well, we are all human beings afterall…
The impulsive nature of chasing trades almost always disregards fundamental analysis, technical indicators and risk management principles, leading to decisions influenced more by emotion than logic.
Psychologically, chasing trades stems from FOMO around potential profits or the desire to recover losses quickly.
You feel compelled to enter a trade based on a sudden market movement or a perceived opportunity, without considering the underlying factors that are actually driving price action.
This impulsive behaviour results in increased risk exposure and undermines your long term objectives.
For example, imagine a time when you’ve missed a significant price movement in a currency pair and decided to enter the trade at a higher price point in hope you can still catch the trend.
Despite lacking a solid entry point or a clear strategic reason to enter, you’ve succumbed to the urge to chase the trade, driven by the fear of missing out on potential profits.
Of course the market has reversed on you unexpectedly, resulting in losses that quite frankly shouldn’t have come.
Another scenario which I’m sure you can relate to involves experiencing a string of losses and attempting to recoup them as quickly as possible by chasing high risk trades
All without proper analysis or consideration of what is actually happening in the market.
This reactive approach always leads to further losses, exacerbating your emotional distress and eroding confidence in your forex trading strategy.
The pitfalls of chasing forex trades
Chasing trades in the forex market carries significant risks and drawbacks that will lead to adverse outcomes.
The primary pitfalls of chasing trades is the heightened risk of incurring losses.
When you chase trades, you likely have abandoned your initial trading plan and entered positions impulsively, without proper analysis or consideration of risk factors.
This impulsive behaviour exposes you to increased market volatility and unpredictable price movements, amplifying the potential for financial losses.
Moreover, chasing trades will contribute to emotional stress and psychological strain on all aspects of your life.
The emotional rollercoaster triggered by chasing trades, including anxiety, frustration, and self doubt, will cloud your judgement and impair your decision making abilities when good setups present.
As losses accumulate, you’re going to experience heightened levels of stress and emotional turmoil, which can negatively impact your overall wellbeing and mental health.
It sucks, right?
Impulsive decision making, a hallmark of chasing trades, will have an extremely detrimental effect on your trading strategy too.
By deviating from established trading plans and risk management principles, you expose yourself to unnecessary risks and undermine the integrity of your entire trading approach.
Chasing trades often results in inconsistent and erratic trading behaviour, making it challenging to maintain a disciplined and systematic approach to your strategy.
That’s right, the impact of impulsive decision making extends beyond just the random individual trades you end up taking, disrupting the overall coherence of your entire strategy.
By succumbing to the temptation to chase trades, you will neglect essential aspects of your tried and tested forex trading strategy, such as proper entry and exit points, risk-reward ratios and position sizing.
Once you start down this slippery slope, it’s extremely hard to stop yourself from continuing down the entire mounting.
Therefore this lack of discipline and foresight will compromise the effectiveness of your entire trading strategy and hinder your long term profitability.
Strategies to avoid chasing a forex trade
To avoid falling into the trap of chasing trades and maintain a disciplined approach to your forex trading, implementing practical strategies and adhering to your structured trading plan is essential.
Here are some tips to help you mitigate the risks associated with chasing trades:
- Establish a Clear Trading Plan: Develop a comprehensive trading plan that outlines your trading objectives, risk tolerance, entry and exit criteria and position sizing strategies.
- Set Realistic Goals: Define achievable trading goals and objectives that align with your financial capabilities and risk tolerance.
- Exercise Patience: Practise patience and wait for favourable market conditions that align with your trading strategy.
- Use Limit Orders: Utilise limit orders to enter and exit trades at predetermined price levels.
- Implement Risk Management Strategies: Prioritise risk management and implement appropriate risk management strategies, such as setting stop-loss orders and managing position sizes.
- Stay Informed and Remain Adaptive: Stay informed about market developments, economic indicators and geopolitical events that may impact currency prices.
- Review and Evaluate Your Trades: Regularly review and evaluate your trading performance to identify patterns of impulsive behaviour or deviations from your trading plan.
Final thoughts on chasing your forex trade
Navigating life as a forex trader requires a keen understanding of the dangers associated with chasing trades.
Put simply, you have to recognise the impulsive nature of chasing trades and the detrimental impact it can have on your trading outcomes if you’re going to not fall into the trap.
Self awareness and discipline are crucial in avoiding impulsive trading decisions.
By understanding the psychological factors driving impulsive behaviour, you can develop the resilience and emotional intelligence needed to resist the temptation of chasing trades.
Maintaining discipline and always sticking to your plan is paramount in mitigating the risks associated with chasing trades and making money over the long run.
Best of probabilities to you.