Why do we end up making bad trades?
There’s a situation you really don’t want to trade in - maybe you don’t like the chart, the timing feels off, or something just feels off. So, you’re sitting on the sidelines.
Suddenly, a massive spike appears on the chart. The price starts shooting up faster than one of Elon Musk's rockets.
Your entry point is worse than the average Kathy Wood position on tech stocks, your SL is in a terrible spot (if you even have one), and when you hit your TP, the trade is set to close with a stunning rr ratio of 1:0,5.
You made the decision without an initial plan. Not based on analysis or the variables in your system, but impulsively, subconsciously, and purely influenced by the price movement.
The decision-making process isn’t driven by logic, it’s just plain impulse
So why does this happen? When the price starts to spike unexpectedly, your brain goes into “fight or flight” mode.
You’ve got this internal timer screaming, “AAAAAHH, LET’S GO!” - there’s no time to think things through.
At that moment, logic - like that slow, resource-heavy part of your brain - gets shut down because it can’t keep up with the situation.
Instead, a faster part of your brain takes over, one that can react at lightning speed but doesn’t have the ability to analyze. Instead, it makes decisions based on very simple signals that are taken at face value (critique is for logic).
Price movement acts as that signal. Given enough time, we can realize that just because the price is speeding up, it doesn’t mean it will keep moving in the same direction. We might see that the current prices aren’t great for entry, there’s no good place for a sl, and the rr is pretty terrible.
Meanwhile, that quick-thinking part of our brain just goes with the emotions - fear of missing out takes over.
This kind of behavior is typical when we find ourselves in a stressful situation, where speed in decision-making trumps analysis: a car speeding toward you doesn’t give you time to think.
In that moment, the simplest and most obvious solution - jumping out of the way - helps avoid a collision. But in trading, nothing is threatening us, and we need to break that kind of thinking.
When opening a position, two separate processes happen: making the decision and acting on it. These are different steps, and it’s important not to blend them together
Walking down the street, I see a poster outside KFC and suddenly want wings that I’ll regret the next day - that’s me deciding to buy. But to actually make that happen, I’d have to go inside, walk up to the counter, and buy the chicken.
There’s a time gap and some extra steps between deciding and taking action. This allows us to think through the impulse - do I really need these wings? After all, I’m not that hungry; it’s just a quick pleasure and probably not the healthiest choice.
When you’re in front of the terminal with your finger on the button, there’s no gap
The decision and action blend into one instant. This shouldn’t happen. You need to separate these processes over time, with a phase in between where you can just think.
This helps avoid a "fight-or-flight" reaction and gives you time to consider your decision before acting, like with the KFC example. On the chart, you should have two points: one where you make the decision, and another where you act on it.
A well-structured trading system with a clear set of rules can really help with this. These rules come from testing ideas through backtesting and forward-testing.
You’re a scientist testing hypotheses to achieve a positive result. The chart is your lab, and your trading concepts are the variables you rearrange until you have a profitable system.
Only then should you start trading live.
The system needs to be right in front of you - not digital, but framed on your desk. You should always have a way to remind yourself of what you want to see on the chart and if your impulse aligns with the system’s criteria:
- Minimum rr below which a position won’t be opened;
- Clear criteria: what you want to see, where you want to see it, and when;
- Pre-calculated risk per trade so you trust both yourself and your system.
If all the conditions are met, you won’t end up in “fight-or-flight” mode.