How do we know when we are overtrading the forex markets and why is it such a big problem?
Most traders are unaware they are actually guilty of overtrading but it is a habit that can cause many traders problems. If you find you are making profits but end up giving them all back, you may be falling foul to this common problem.
So what is overtrading?Overtrading can manifest itself in a few variations, the main types being:
1) Taking too many trades and not being strict enough on what criteria a trade setup should have.
2) Trading without a plan, resulting in over analysis and altering trades once opened.
3) Over exposure, by this I mean holding two or more trades at the same time containing the same currency pair. This is very dangerous and increases our exposure to levels which are unhealthy.
Overtrading in general describes the process where a trader finds themselves too active and impatient in the forex markets. They over complicate trading by over analysis and are unable to refuse entering weaker trades due to a lack of discipline. Once in trades they have no set plans and so lose all hope of getting consistent results.
Reasons for overtradingThe main culprit that causes overtrading is very simple- lack of discipline and rules.
The patience required to trade is usually an area over looked by many traders and instead they focus their attentions on being as active in the markets as possible. It's that feeling of not wanting to miss out on a trade and so even if a trade does not quite fit in with their rules, they have to take it.
This type of mind-set results in traders finding extra reasons why they should enter a trade below par. They are hell bent on being a trader and feel the only way to justify themselves as traders is by being in the markets as much as possible.
It's like these traders are addicted to chasing the forex markets, rather than letting the markets come to them.
This habit can not only be very destructive but a tricky thing to break. If you think back and analyse your trades, I guarantee there will be a few standout trades I bet you wish would form all the time and some questionable trades that you probably felt were riskier trades but still took. If this does rings true, by the end of this article I hope you will have a better idea of how to solve overtrading and remove it completely.
Traders who can't seem to make consistent gains are usually not bad traders themselves but are the traders who take too many trades, because they are unable to hold their nerve and wait for the best trades.
Solutions to help remove overtradingThe problem of solving this habit is quite simple and it boils down to having a consistent trading discipline with set rules. However, this is not necessarily that easy to fix if a trader is not used to following rules.
Rules, help us form a discipline required to trade consistently. We need rules to cover every aspect of trading, from where to look for trades, to what makes a valid signal, etc……
The rules we choose help us decide what trades we can take and how they should form. They have to be very detailed and leave no margin for movement. If a trade doesn't meet the correct criteria we must learn to let them pass by and wait for the really solid trades.
Once we have these rules in place and follow them with an iron fist we must also introduce a trade plan to manage our live trades. The trade plan will set out exactly how we plan to manage a trade and this again must be detailed enough to reduce you from interfering with live trades. Trade plans must also be written up before entering any trade.
To prevent exposing ourselves to unhealthy risk levels, we need to make sure we do not open more than one trade for a particular forex pair at the same time. This is very important because opening two trades with the same currency can result in doubling our exposure.
Another valid point to remember is to always risk the same amount per trade and not adding more risk on one particular trade just because it looks too good to fail. No trade is guaranteed and we have to recognise this. Getting ahead of ourselves is why traders get cocky and forget what got them into a position of making consistent gains.
Remove the bad apples from your tradingIf you can learn to remove the bad apples from your trading, the results will speak for themselves. The knock on effect of this though is it will reduce the number of trades you take and this is something that takes time to get accustomed to. Again installing discipline into your trading is what will get you through this and eventually you will start to enjoy the hunt and waiting for the standout trades to from.
Overtrading is not such an easy process to solve but once you are able to recognise this is a fault in your trading and introduce proper rules and discipline, you will find profits become more constant over time.