How to Avoid Overtrading with Forex

How to Avoid Overtrading

Trading successfully is an achievement that hinges on a trader’s internal battle with ambition and their intention to further educate themselves in financial matters that directly affect their investments. Whilst you may be correct in forecasting market movements, money can still be lost at the end of the day. The issue here comes from the greatest of all mistakes: overtrading.

Due to the many factors that play into this concern, overtrading is not limited to the inexperienced. Ambition, greed and impatience are human qualities that can affect the trading style of anyone during a moment of weakness. To combat these faults, risk and money management strategies are good practice.

Patience is a Virtue

We all want to be right, it’s human nature. But unfortunately, it’s this very mindset that can initially dig a trader into a deep pit of exposure. When a market sits against a trader’s position, some choose to continue to hold multiple positions in the same direction in the hope that a turn will eventually occur. Soon enough this form of overtrading results in accrued losses and things start to get out of control.

A lack of patience and discipline is at the core of loss. For instance, should you be taking a trade based on a daily chart analysis – let’s say a triangle that’s looking to break higher – the expectations for the upcoming target should be made according to the daily time frame. In this case, the triangle may take some time to break, but perseverance is key. A common mistake made by novice traders is that they choose to watch the fluctuations in their underlying asset, inevitably losing confidence in their investment decisions as time passes by, perhaps switching sides or adjusting their original trade position.

Leverage Products

In order for retail traders to gain access to the immensely liquid financial market that forex represents, brokers offer leverage trading. Leverage is offered as a ratio, ranging from 1:10 anywhere up to 1:1000, depending on the broker and their status of regulation. This leverage enables investors to make bigger trades – an invitation for earning substantial profit. However, these are in effect loans, and can amplify potential losses as well as gains. By the time a margin call is triggered, some traders may find themselves with an empty account.

Overtrading is so strongly related to the leverage of an account that many leading financial authorities are ordering limitations to be placed on the ratios available through online brokers.

This is due to the fact that a small leverage will always allow a trader a second chance to review their analysis and the reasons why the trade has been initiated to begin with. If a strategy continues to be valid, then trading with a smaller size is the way forward. Likewise, alternative opportunities can be sought out in the FX market if their analysis falls short – an option only made available because their initial exposure wasn’t too big.

In short, overtrading is the foremost cause for triggering margin calls. The need to turn a quick profit tends to override the risk of losing all the money invested in a trading account. As a retail trader, you must strive to maintain your composure when positioning yourself in the market in order to avoid burning out.