How To Avoid Overtrading

How to Avoid Overtrading

Overtrading isn’t a problem that is limited to the experience of FX traders. Binary options trading comes with its own risks and mistakes are easily made. Strategies should always be in place to help you to avoid exceeding your risk capital.

What is Overtrading and How Does it Occur?

To overtrade merely implies taking multiple positions in the same direction, either in a desperate attempt to save the account or make a big profit in a short space of time. Whilst in certain instances this may work, it is essentially a gamble and lady luck is not the beneficiary of a disciplined trader.
To combat potential mistakes early on, we must first consider the expiration dates offered by a broker, as these relate directly to time frames and on to the analysis that is made. For instance, if technical analysis is applied to a daily chart and we are looking for the reversal in the bullish market, trading put options with five-minute expiration dates would be a mistake. To eliminate the randomness in trading, the expiration should always be larger than the time frame the analysis is made.

With a focus on the technical elements and its framework, many traders only have eyes on the prize. To keep a close watch on just the price is a mistake; it may be that your option does not come into profit until the very last moment – just minutes before expiration. If a trader watches this unfurl, the temptation to take another trade may be too big and few resist the urge – after all, if the market is moving against you, you have a better striking price, right? Wrong. Unfortunately, this is when overtrading tends to appear, and it takes only a couple of these mistakes to result in a blown account.
Many people falter when waiting for the market to come to them. A lack of patience for the right strike price can result in multiple trades being taken in the meantime. The kicker comes when the market hits the original strike price position. With multiple alternative trades in place at that point, overtrading can kill the account.

What’s the Solution?

Maintaining discipline and patience is the key to success in an arena where human nature is well represented. Anger, greed and fear dominate and it is likely that you will succumb in a moment of weakness. Yet, a sound money management plan can always help overcome the impact of overtrading in binary options.

A coherent money management plan should therefore be established at the very start of your online trading career. In particular you will want to be strict with yourself, setting aside a designated figure of risk capital that you are prepared to part with should anything go awry. This should be followed by a decisive percentage of investment capital that you are prepared to trade with each time you open a position. This percentage may vary in modesty according to your trading personality and style, but in either case should act as a strict limitation.

It is advisable that you take advantage of any risk reduction tools or features that may be available through your broker’s platform These appear in many formats, but a demo account is a great place to start. Moving on from the safety of this virtual environment, you’ll want to look for any quick cancellation, rollover or buyback features. Low minimum trade entry requirements (such as $1 or even 10¢ trades) are great for furthering experience; you can apply new analysis or strategies without burning a hole in your pocket if they don’t work out.

Alternatively, a novice binary options trader may consider social trading. Although copy trades come with a different set of rules and risks, there will be those of you who prefer to minimise the pressure to make well-calculated decisions by handing the role over to a more experienced and profitable professional.

In conclusion, when it comes to overtrading and risk management, the best course of action is one that has been self-procured, addressing your individual needs and weaknesses. Avoid making the mistakes of other inexperienced traders by establishing an excellent trading strategy, taking into account the importance of patience and restraint.