Tutorial: 4 Steps to get rid of overtrading

One of the most frequent mistakes when it comes to trading, on any market, not just Forex it’s overtrading. Overtrading can lead to substantial losses when the market is not clear enough.

But the other extreme isn’t that good either, trading less frequently when the market has clear market conditions can stop us from reaching our goals on a monthly basis.

There is no “right” amount of trades to be made on one particular day, week or month! I guess that depends on each trader and the methodology each one of them is following.

But we know something for sure: If you are consistently losing money it’s because:

  1. You don’t have a complete and sound strategy (or not following it). This includes using money management, risk and trade management, entry system, SL and TP orders, etc.
  2. You are Overtrading. You are trading with more frequency than you are supposed to trade.
  3. You are not taking advantage of the opportunities offered by the market. You are trading with less frequency than you are supposed to trade.

In this article we’ll focus on the latter two.

Over Trading

You are overtrading when you are taking more trades than you are supposed to take. Traders make this mistake when they feel overconfident (i.e. think you are better than your system), they don’t trust their methodology, want to make a quick gain here and there, they are just following some one else’s advice, etc.

Sometimes traders tend to focus on the profit potential and don’t take in consideration the risk involved on a particular trade, this leads them to take more trades than they should. On the other side, professional traders follow their strategy because they know that only when their system signals a trade, the odds are on they favor, and they just take advantage of it.

Other times, especially for novice traders, when they are not trading they feel like they are doing nothing, so they just take a trade to make them feel they are doing something, even when their trading capital is at stake.

You need to remember that being on the sidelines is a trade decision, you are preserving capital. For instance, let’s consider these two scenarios:

A.    You are eager to trade, your system doesn’t signals a trade and you decide to enter. The market goes against you and stops you out.
B.    You are eager to trade, your system doesn’t signals a trade, and you stay on the sidelines.

On scenario A, you lost money, while on scenario B, you preserved capital. So being on the sidelines is actually a trading decision that could help you reach your goals on a monthly basis.

Not trading when market conditions are clear

If you have a system and you are not trading when you are supposed to trade, the first thing that pops up on my mind is that you are afraid of losing. You need to remember that when you developed the system, created an edge, you know exactly what the market needs to do to help you take advantage of low risk trading opportunities, what is left for you is just to take advantage of it.

Losses will be around forever, professional traders know this, they know its impossible to win all trades, there is no system that is right 100% of the time. And those traders who look for high accuracy entries, most of the time (if not always) they have a very low risk reward ratio, which is what really help us trade consistently.

Don’t be afraid of losing, even the most famous and profitable traders know that around 80% of their profits come from around 30% of their trades. They are comfortable with their system and they know that in order to become profitable traders, they just need to follow their system, if it was well developed and includes good risk and trade management, probabilities will play in their favor, sooner or later.

I guess these two mistakes have a lot to do with the strategy we are following, we need to feel comfortable with it, and this way we’ll follow it with discipline and get consistent results at the end.

Here is small set of rules that will help you get rid for once and for all of these two mistakes:

  1. Develop/follow a system. First you need to develop an edge, you can use some one else’s, but you need to make sure it fits you and follow it to a 100%. It should include every important aspect of trading such as: how to set entry and exit orders, risk and trade management, position sizing, etc.
  2. Market analysis. At the beginning of your trading day, make and analysis and determine which currency pairs have a clear market condition. The main goal of this step is to determine which currency pairs to trade and on which direction.
  3. Setup. Determine what the market needs to do to make you enter your positions (i.e. the market needs to retrace back to the support level, the indicator reading needs to cross the overbought territory, etc).
  4. Trading Journal. You need to have a record of your trades, when you analyze your trades you’ll notice certain “patterns” about your trading that are difficult to see at simple sight (i.e. most trades around 11:00 an stop me out).

Follow these four steps and you’ll avoid these two costly mistakes.

By the way, you can download the market analysis, setup and trading journal sheets that we use every day to determine when to trade.


Raul Lopez

I've been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .