Forex Overtrading – A sure fire way to blow your account. 
We’ve all heard stories (or even had experience) of traders blowing their capital in a short amount of time. This usually happens for one of three reasons: Over trading, over leveraging and improper money management. Just doing one of the three mentioned, can almost certainly guarantee a trip down a short road to failure. For this article we’ll focus on the pitfalls of overtrading and ways in which to eradicate this common problem faced by many traders.
Overtrading is one of the biggest mistakes made by most traders with very few even knowing they’re doing it. It’s not uncommon to find traders telling themselves ‘the more I trade, the more money I’ll make’. Unfortunately this is never the case. Successful traders focus on quality not quantity. There are a variety of reasons why traders fall into the trap of overtrading, below we’ll take a look at the 10 most common.
Feel and ‘urge’ to trade – Many traders often find themselves feeling an unexplainable urge to trade, often feeling they’re missing out if they’re not participating in the market.
In a rush to make money – Every trader trades for the same exact reason; money! However it’s not surprising to find the majority of new inexperienced traders entering the forex market thinking they’ll become ‘millionaires overnight’. Traders in a rush to make money often find their judgment clouded and forcefully ‘look’ for trades that are not there as opposed to trading what the market makes available to them.
Don’t stick to their trading plan – Ever successful trader will have a trading plan that they are disciplined in following. A trading plan is the traders guide and rules they use before entering a trade. Their plan will define the criteria they must follow to be a consistently profitable trader. Some traders don’t have a plan, or if they do, rarely adhere to it. Its common to find traders ‘bending’ their trading rules so they have more opportunities to trade. Some traders even add to their plans with new rules or guidelines on a regular basis allowing them to trade more. They feel they are still sticking to their trading plan, when in reality are distorting it and end up over trading.
Feed their ego – A lot of traders fall into the trap of becoming egotistical and boasting about how much money they’re making or what exotic markets they’re trading in. Some traders like to tell their friends and family about their success which can indirectly lead to over trading as they may find themselves under pressure to feed their egos and attempt to avoid embarrassment.
Over confidence – A trader who has just experienced a string of winning trades can find themselves being sucked into the euphoria of short term success. This in turn boosts their confidence in their ability with the ‘’I’m on a roll, I can’t lose’’ outlook. They then think they’re on a ‘hot streak’ and want to make the most of it so end up taking more trades than they should, which ultimately has a negative affect on their account. Over confidence is a dangerous trap to fall into as the markets have a funny way of brining over confident traders back down to earth with a bang.
Gut instinct or feeling – Over trading can be a result of ‘gut instincts’ or ‘feelings’ about what the market is going to do. Some traders enter trades on a gut instinct or feeling with no market analysis behind their trade. Traders who fall prey to this type of trading usually find themselves taking more trades than they should. Its important for traders to remember that just because they have a ‘feeling’ about what will happen next, does not mean it will. Analyzing the market prior to entering a trade can help eliminate trading on instincts or feelings.
Think they’re missing out if they’re not trading – Although obviously inaccurate, many traders seem to think that because the forex market is open 24 hours a day 5 days a week they must be participating in the market for the duration its open. Some traders find themselves waking up in the middle of the night wanting to trade, because if they don’t, they’re missing out on money. This is the complete opposite of what successful traders do. Successful traders take money from the market when it’s made available to them according to their system/plan; they don’t feel as though they’re missing out on anything when they’re not participating. It’s important to remember that the market is not going anywhere and will be here tomorrow with more opportunities to trade.
Specific goals or targets to meet – In other aspects of life or work many people are recommended to set a specific target or goal to meet. In trading it is wise to set the same sort of targets or goals; however it’s unwise to chase or become obsessed with reaching your target. A trader may set himself a target of making $1000 next week. He may find that on Thursday afternoon he is down -$500. He now thinks he has to make $1500 in the next day in order to reach his set target. He’ll then ‘look’ for trades that are not there or open a large number of trades exposing himself to more risk than he’s used to because he has to reach his target of $1000. He may find himself overtrading on Friday because his obsession with reaching his target is interfering with his trading plan/strategy. When trading its true we’re all trying to make as much money as possible, however it’s essential to remember that although wise to aim for a specific target or goal, not to become obsessed with them and only take what the market makes available.
Addiction and Gambling – A small number of traders (although increasing in recent times) seem to forget that there is a difference between trading and gambling. Gamblers who trade are doing so for the wrong reasons. Traders trade to make money, whereas gamblers trade for the ‘rush’ and excitement felt from risking real money on an unknown outcome. The rush or excitement is increased when more trades are open which leads to overtrading. Some people feel this rush or excitement when opening their trading platform and seeing many open trades in front of them. People can sometimes become addicted to trading. Much like other addictions, a trading addiction can have a detrimental affect on the person addicted. People addicted to trading are again prone to overtrading feeling they ‘need’ to be in a trade in order to ‘feed’ their addiction.
Boredom – This is possibly the worst reason to trade, however some traders actively trade to ‘pass time’ because they are bored. Needless to say that trading out of boredom will lead to taking on extra trades and over trading the markets.
The 10 reasons listed above are the most common reasons traders fall into the trap of overtrading. As mentioned overtrading will have a detrimental affect on consistency and success. Following the guidelines below can help over traders eliminate this bad trading habit.
Make a plan and stick to it – Keeping a trading plan is essential to successful forex trading. Every trader should have a tangible plan next to their work station. Many traders think they have a plan however very few have one in black and white somewhere they can see it when trading. A trading plan is of no use if its ‘stuck in your head somewhere’ as it can be easily forgotten. Following with great discipline of your trading plan is essential to eradicate overtrading. It’s important to remember that your trading plan is your guide and rules to success.
Use Higher Time Frames – The use of higher TF’s will greatly reduce your number of trades, however it can greatly increase your number of winners. Higher TF’s cut out the ‘mess’ seen on lower TF”s. Becoming proficient in a daily timeframe and then moving down to a 4hr and possibly 1hr is much more beneficial than trading a 5minute TF. Although you may have more trades on a 5min chart as opposed to a daily chart we must remember we’re looking for quality not quantity.
No need to look at your charts 24/5 – Although the markets are open 24hrs a day 5 days a week there is no positive affect of staring aimlessly at your charts all day. It’s true the markets move all the time; however it’s also true that you can’t catch every singe move the market makes. Looking at your charts all day often can lead to over analyzing or searching for a trade that is really not there or bending your trading rules because you think you see something that may be a winner. Analyzing the markets really should not take a long time. For example if your system requires you to only trade a 4hr chart then there is no need to look at your chart every five minutes. Analyzing the chart every 4 hours (or an interval in line with your plan/strategy) will keep you from over trading.
Keep it Simple – Over complicating your charts or over analyzing the markets are of no use unless you want to confuse yourself and over trade. Over analyzing is common in over trading traders. Keeping your charts clean and clear of ‘mess’ will allow your to see the only real information you need to trade successfully; the price. Trading using price action allows you to fully analyze the market without running the risk of over analyzing or over trading.
The biggest obstacle most new traders face when trading is themselves. Once a trader can learn to control their emotions and look at the markets with a clear and patient mind mistakes such as overtrading can be cut down on and profitability built on.
