Over-Trading The Forex Market - Are You Following Your Rules?
The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand. Sun Tzu
Over-trading is one of the biggest account killers out there and a common mistake made by Forex traders – whether it be newbies or experienced market participants. A lack of patience and discipline to sit on their hands during unfavourable environments, when decent opportunities are lacking, causes many of them to take bad trades. Most of this comes down to a lack of preparation and willingness to stick to a plan. This post will try to define over-trading and present several tips to help enable you prevail over this incredibly harmful pattern.
Do you over-trade?
There is a tendency for traders to overtrade if they put pressure on themselves to earn money; this can distort what is actually taking place in the markets at a given time. It’s probably fair to say that many traders not yet seeing consistent profits from the markets over-trade. Sometimes it’s hard to see the” wood from the trees” and you can find yourself over trading without even knowing it’s happening.
One simple question to ask yourself is “do I stick to my trading rules?”, if the answer is no then this is the first area for your to look at. You are breaking your rules and most likely overtrading in the process.
Lower timeframe charts – how much information can you effectively process?
Are you trading on the lower timeframe charts instead of the daily? It is not advisable to trade on the lower timeframe charts before you learn how to turn a profit on the daily. 5 minute charts and similar have the trader processing a lot of information with little margin for error which can lead to a kind of “burn out” in the face of too much information; you may for example see price miss your take profit level by one pip and subsequently move back to break even level in seconds…are you ready to deal with this scenario?
Does this sound like you? Do you struggle to deal with it? If the answer is yes you are probably overtrading.
Plan the trade and trade the plan
In the heat of the moment it is easy to find yourself staring at a sub-optimal setup and deciding to discard the trading plan. Take one more look at the Sun Tzu quote above…”the general who looses makes but a few calculations beforehand”. At the time it seems like a good idea and a good way to make a quick profit… you may say to yourself that “I am experienced enough to trade this scenario and have a great opportunity to win here” but will most likely not trade the setup as well as you would with proper planning. Over a given period of time you will probably see your account balance decreasing…Even worse when you enter a trade which breaks your rules and it turns out to be a loser if you then fail to take the next valid trade signal and it’s a winner…
It is difficult to be level headed and make decisions which are in our best interest in the heat of the moment. There is a good chance that if you are now looking for forex education articles like this one you are most likely over-trading and do not have a trading plan which you rigidly follow. Habits are formed by repetition and trading habits are the same. Emotional trading is an account killer and everything should be dome to quantify your trading rules in cold blood before the adrenalin kicks in when trading.