Overtrading during Trading Forex
Entire libraries have been written and published on a subject of trading mistakes. Just about every trader with some experience has his own list of pitfalls. They can vary from under capitalization to over leveraging to lack of general market education. While the list can be very long, few mistakes make the list on a more consistent basies than overtrading.
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It is easy to say that, but when exactly does overtrading happen and how do we define it? More importantly how do we recognize it and prevent it from happening? Not one simple answer will be applicable to all traders, as it can only be determined in light of persons' trading style.
Perhaps the easiest type of overtrading to recognize happens to traders who use a clearly defined systematic approach. In other words, mechanical trading systems. If you are using software generated signals to trade or some other form of auto trading and you start taking more and more trades outside of your system, you are probably ovetrading. This happens usually during a period of time when the system is under performing. Since all systems go through weak periods, it might easily happen to everybody. Good news is, this is easy to notice and correct.
More difficult to pinpoint is overtrading happening to discretionary traders. Those who do not use mechanical systems are, generally speaking, trading in a discretionary manner. However, even here traders follow some strategy. These could be price breakouts, reversals, times of day or many, many other possible set ups that trigger a trade. It's good to look at a number of trades say from week to week, analyze both entry and exit points and, of course, results. If you take more and more trades, with slipping results, you might be overtrading. Traders often tell themselves they are “optimizing” their strategy, or employing a new method. If that's the case, you can always open an additional account to trade another approach. That should make it easier to notice any problems, like a nonperforming system, not following your rules, or overtrading.
Day traders who start leaving position open overnight or find themselves sitting in front of the computer longer and longer each day, are almost certainly overtrading. Just because Forex can be traded 24 hour, doesn't mean it should be. Determine the time of the day most suitable to your lifestyle or fitting your trading strategy and stick to it. Around the clock trading availability is not a trading necessity.
Trading too many markets at once - there really is no need for an individual trader to have an open position in 15-20 pairs at the same time. First of all, this uses up available margin collateral very quickly. That can easily lead to a margin based liquidation if enough positions turn against you. Also, this kind of “dart board” approach implies that trader analyzed all those crosses and has a well developed strategy for all. In most cases that is very unlikely to be true.
Yet another form of overtrading is always having an open position. This suggests, that trade opportunity is ever-present and one always knows what it is. That is simply not possible. Furthermore, it exposes a trader to a constant market risk. A trader who is always in the market is very likely not pursuing a well defined trading plan.
Overtrading ranks as one of the most common trading pitfalls. Thankfully, it's also the one that is most easily avoided. Unlike intrinsic market risk, this one can be controlled by an individual. Periodical review of trades can show if you are trading more than your trading plan calls for.
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