Forex Mistake #5 – OVERTRADING

Overtrading is a symptom of a bigger problem; the one we have already discussed in :

GREED, BABY—GREED

Overtrading is typically defined as doing a lot of trades, mostly losers very quickly. Sometimes overtrading can be defined as trying to trade too many separate markets. Sometimes it is defined as jumping back into a market immediately after you have gotten out. No matter how you want to slice it, making this mistake is very deadly to your equity.

Here’s why you need to guard against overtrading:

THE TRADE IS A LOSER!!  YOU OR THE SYSTEM OR BOTH ARE WRONG!! STOP TRADING FOR NOW!!

By continuing to throw good money after bad you are no longer trading; you are gambling and/or hoping to get your money back. You are not thinking clearly and you are probably ignoring reality. It would be better to take a break and go do something else for a period of time. When you are in a state of overtrading you are doing something that is completely psychological in nature and has nothing to do with the markets. You see, the market does not know you have any position on at all. The market is simply doing what it is designed to do—process orders from traders. The market has no idea what the results of those orders are for any one trader. If you have lost touch with reality and can’t figure out which direction the market is more likely to continue moving in, it is very likely that you will be on the wrong side of the price action; you will likely lose more. If you compound this problem by trading excessively your probability of success drops even farther.

Overtrading

It is better to take a break and just take your lumps. As long as you have equity in your account tomorrow you can come back then and take a fresh look at it. If you continue overtrading there is a strong probability you will lose a significant amount of your equity making it next to impossible to recover easily from a minor set-back.

Losses are part of the game. They are a minor set-back. If you complicate your losses by wildly flying in and out of the market hoping to get your money back you will lose your cool. You will no longer see the market in an objective manner or let your system help you come back to even. All trading approaches have their share of winners and losers. If you compound your problems by doing trades your system never asked you to do, plus overtrading in the process, you are headed for a meltdown.

Overtrading is easy to spot and simple to stop. First, if you are doing trades your system hasn’t called for you; you are overtrading. If you are adding to a position (trading more) without a profit; you are overtrading. If you are reversing after a loss (taking a loss then going the other way) and getting whipsawed; you are overtrading. If you are adding to a losing position with more contracts than when you first did the trade; you are overtrading. If you are “winging it”; you are overtrading. If you are trading too many markets and committing 100% of your equity all the time to all those markets; you are overtrading.

In short, overtrading is any trading you do that is not part of your original plan and not part of your trading system. Overtrading is any trading that causes you to risk more than a reasonable amount of your equity on any one trade. If you spin yourself silly you will not have enough equity to recover. Don’t be the trader who is overtrading.

HOW TO MAKE THIS MISTAKE WORSE: Ignore common sense with regards to how much trading you are doing, don’t count the number of trades you did daily, tell yourself it is OK to add to a loser “just this one time”, get angry with people who ask you how you are doing, ignore professional advice, trade without a stop-loss order.

SOLUTION: Set a number of losing trades in a row and stick to it. If you number is three losers in a row; then have the courage to quit after those three losers. Don’t go back in 4, 5, 6 or more times thinking “you will get it back”. Ask professionals to look at your trading history and follow the advice they give. If you have a certain number of losing days in a row, take a break for a few days.

Source : Ebook by www.forexbrotherhood.com

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