How overtrading the FX markets can injure your confidence and harm your account.

2nd March 2019 Off By binary


One temptation FX traders have to avoid, is the compulsion to over trade. Overtrading shouldn’t be confused with revenge trading, which is simply a destructive habit, whereby you might go on full tilt like a gambler, forcing trades that don’t match your: criteria, method and plan, in an attempt to win back recent accumulated losses. Overtrading can be a far more subtle phenomenon, which you mightn’t be aware is actually harming your chances of trading success. It can also prove to be difficult to identify, as you mightn’t experience the same sense of losing your self control and discipline, as you would with revenge trading.

If you’re a day trader, there probably isn’t a set amount of trades you can limit yourself to, on any given day. Each moment in the market is unique, no two days are the same. However, you can place limits on your losses and place circuit breakers into your trading plan, which may help curb your temptation to overtrade. For example, you may decide to only risk 0.5% of your account size per trade and take a decision that any daily losses will be limited to 2.5% per day.

Despite your temptation, that you may believe you can win back your losses, you may have decided that if you suffer five losses in series, the 2.5% mentioned, during the day’s trading sessions, then you stop trading for that day. In doing so, you’ve begun to build into your trading system, various warning systems that’ll alert you to the fact that there are some days when your trading system, despite how refined it might be and how carefully you’ve constructed it, just won’t be conducive with the underlying market conditions. Placing such a circuit breaker into your trading plan, perhaps by use of your MetaTrader platform, can prove to be an excellent physical barrier, to prevent excessive trading.

Due to its subtle nature and difficulty to identify, overtrading can have a negative impact on your trading and account for some time, before you begin to recognise it and become aware of the devastating effect on your trading account and your psychology. As previously referenced, the phenomenon is not necessarily a character and or a personality issue, if you’re religiously sticking to your trading plan. The good news is that once you’ve quickly identified overtrading, the remedies you can put in place, could have immediate benefits. Analysis of your plan, your trading strategy, what if contains and how to adjust it, can help to identify and eradicate overtrading, whilst analysing the prevailing market conditions, could also provide quick remedies.

Identifying the current and prevailing market conditions is essential. Let’s surmise that you’re a swing trader, can you identify how many times the securities you’ve chosen to trade, actually display the characteristics you need in order to take a trade? How often does it happen, perhaps once a week, once a month? If the conditions only occur once a week then why are you trying to force swing trades every day, or twice, perhaps three times a week? Do you need to re-examine your strategy, does it have critical faults, if it’s generating so many false signals?

It’s at this stage of the re-examination of your strategy and self, that you might also begin to recall the basic rules on risk and probability. Again, for the purpose of debate, let’s surmise you’re a swing trader, but rather than patiently wait for the trade criteria to appear on your chart and specific time frame, relating to only one currency pair, you look at several pairs and take a trade whenever the conditions are met.

For example; you might trade: GBP/USD, EUR/USD, USD/CHF and USD/JPY any time, when a combination of four indicators perfectly align to give you an entry signal. But as a swing trading strategy this might be considered excessive. If you are prepared to trade these major currency pairs exclusively and as a swing trader you risk 1% of your account per trade, then you might have 4% exposure at any given time. Many experienced traders would also identify this as overtrading, despite the fact that there’s nothing wrong with having four positions in the market place at any given time. Therefore, you may wish to consider reducing your risk per trade, or reducing the amount of currency pairs you’ll trade.

You have to recognise the existence and address the phenomenon of overtrading before it becomes a debilitating influence on your trading. Through recognising your levels of risk, establishing the probability of your entry conditions being met and re-examining your strategy, you can take immediate remedial action to ensure both your trading confidence and account size doesn’t suffer unnecessary harm.

Article by FXCC

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