How to Know If You are Overtrading?

Let’s say you are working hard at trading forex and gaining several successes. But somehow, by the end of every month, you are taking a loss. So, what is going on? The answer is: you might be taking trades too much. There are some ways to determine if you are overtrading and ways to fix it.

Emotional Trading

It’s normal for people to watch prices fluctuate and feel like they need to become involved in taking advantage of opportunities. After all, no one wants to miss out on profits or sit back and observe a loss happen, particularly if they forget that they are looking at them in hindsight. For most life fields, people make more money by raising the levels of effort, involvement, and activity within the business. The only concern is, in trading forex, stocks, or commodities, adding more amount of buying and selling activity often to lead to losses and not profits. Why?

This is because the markets do not care how much effort traders out in or how hard they work -whether they get lucky or not. It is likely to make profits or losses over long periods of time by having unexpectedly good or bad luck. And humans tend to feel they either deserve something or not.

 Determining Overtrading

If the description of the said negative feelings strike a chord to traders, then they might be overtrading. Thus, it is time for them to think of several things to know if they are overtrading.

First things first, good trade opportunities do not arrive very often. In the forex market, it is unusual to have more than two or three excellent trade opportunities in a week – unless they are scalping, and even with that, they probably won’t get more than the same number of overall setups to exploit (even if they are taking more than two or three actual trades). If they take trades every day and seek for more than 20 pips of profit, they are already overtrading.

Another thing to consider is the statistical basis of the entry strategy. For instance, a trader opened an account with a forex broker and saw on their website to buy if the 10-period simple moving average crosses above the 50-period moving averages on the 5-minute time frame. If traders would back test a strategy as simple as this in a short time frame like the 5-minute chart, they would immediately see that following such strategy will cause them to lose the whole account shortly.

Several forex brokers promote this kind of poor ‘overtrading’ trading strategy because they earn more money when traders lose. Also, they want traders to lose money as fast as possible so they can make money immediately. So, suppose you are using an entry strategy based on defined mathematical criteria, like moving average crossover. In that case, you must backtest that strategy over some years and thousands of trades to see if it is profitable.

Nevertheless, no one will invest money in a business without learning something about it, so why would you invest a hard-earned trading deposit in a trading strategy with an uninvestigated performance? It is easy to do this backtest in forex as traders can quickly get historical price data and make an excel spreadsheet to check it. Knowing some SQL and using it to make a backtest is faster and easier.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s