All You Need to Avoid Overtrading in Forex (2024)

Forex Overtrading Challenge

Forex overtrading is one of the most challenging lessons for a trader to understand. If you tend to overtrade and you continue to overtrade, you will lose a lot of money.

You expose your money to the market any time you enter it, and the more you expose your money to the market, the more likely it will part ways with you.

In this guide, we’ll unveil what forex over-trading is and how you can minimize overtrading.

What is forex overtrading?

Overtrading occurs when you trade too often, make exceedingly large trades, and take uncalculated risks.

There are no rules or legislation prohibiting individual traders from overtrading, but it can damage your portfolio.

Traders typically overtrade after suffering a large loss or a series of smaller losses during a generally long losing streak. To cover their losses or seek “revenge” on the market, they try harder to make up profits wherever they can, usually by raising their trades’ size and volume.

Unfortunately, many times their trades end up in further losses, and at some point, they blow their account. This is one of the main reasons why 95% of forex traders fail.

What are the signs of overtrading?

When you come to know if you are overtrading, there are several indicators:

– If you close a trade for a loss and believe deep down that you should not have taken the trade, you are guilty of overtrading.

For example, do you find yourself looking at lower time frames like the 5-minute chart and “discovering” better trades even though you’re expected to trade from the regular chart?

– Spending too much time gazing at forex charts leads to forex overtrading when you become vulnerable to seeing too much market activity.

Do you find yourself looking at charts for hours on end, attempting to “push” trade for a “good enough” setup?

The biggest issue is that many traders are clearly unaware that they are over-trading at the moment. It is really possible to get fixated on a less-than-ideal trade setup, lose track of your trading plan, and become uninformed about whether or not you are over-trading.

Since the emotion-inducing conditions in the market can be difficult to identify and even overwhelming at times, you must fight this foe by working out your trading plan and trading strategy when you are not in any trades.

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So, how to prevent forex overtrading?

To avoid overtrading, you need a prescription. No, I am not talking about medical prescriptions, but the ones that will save you from making impulsive or emotional trades.

Here’s the list of things you need to do to prevent overtrading:

Having a trading plan

It is best to go on the offensive against over-trading by developing a trading strategy and a trading schedule ahead of time.

You may consider trading to be a type of warfare. The battle is essentially between your rational or analytical brain mechanisms vs. your emotional brain mechanisms.

The only way to fight this battle is to devise and stick to a systematic forex trading strategy.

If you’re reading this and don’t have a concrete and realistic Forex trading plan, you’re probably over-trading. If you want to get and keep on the right trading route, you must build and commit to a Forex trading strategy.

This is something that all traders must do at first in order to cultivate the right trading patterns of rational and analytical trading rather than emotional trading.

Trading the markets naturally causes emotions and emotional trading, but you will almost certainly over-trade if you do not intend to counteract this fact.

Proper risk management

A risk management plan is needed as part of your trading strategy. This includes the guidelines and procedures you set in order to minimize the effect of making a failure.

You should use two realistic risk-management approaches to ensure that you are not overtrading:

a. Calculate your risk per trade

It is up to a trader to decide how much money to lose per trade. It can range from 1% to 10% for traders who are willing to take on a high level of risk.

However, if you gamble as high as 10%, it can only take five trades to lose 50% of your trading capital, which is why it is usually best to use a lower percentage.

You must ensure that the risk percentage is manageable and that you can still meet your trading objectives for the level of risk you are taking on.

b. Watch out for the risk/reward ratio

To calculate the risk-reward ratio of a trade, you need to relate the amount of money at stake to the potential gain. So, if your maximum possible loss on a trade is $100 and your maximum possible profit is $300, the risk vs. reward ratio is 1:3. Many traders prefer a risk-reward ratio of 1:3.

Limit the number of trades per day

The number of trades often does not translate into large earnings. Instead, the effectiveness of individual trades makes the real difference.

After a fruitful trade and a significant profit, you can be lured to continue trading, but the market doesn’t work according to your commands. It’s not like you’ll rub a lamp, and a genie will pop up and grant you a perfect trading strategy. After a few successful trades, you may start losing.

Here’s a quick piece of advice: Set a limit on the number of trades you want to open in a single day. Keep up with this plan, and if you feel like opening one more trade, remind yourself that there is always tomorrow.

Take a day off

When you lose, you open positions letting greed and anger get the better of you. Some traders overtrade and place too many failed trades in a day because they are blinded by rage and the need to correct the current situation.

So, rather than falling victim to these causes and consequences of overtrading, it is a safer option to take a break to clear the head. While doing so, your rage over the recent loss will subside, allowing you to think more clearly and conduct trades more rationally.

Set some rules

Adding rules to enter a trade will help you avoid putting orders that are not in line with your trading strategy. Technical or fundamental analysis, or a combination of the two, may be used to develop rules. For instance, you may make a rule that encourages you to trade only if the 50-day moving average crossed over the 200-day moving average.

You can’t control the market

Over traders are attempting to gain control over the market. You must genuinely think and question yourself whether you believe you are attempting to control the market. When you understand and truly agree that you have no control over the market, you will begin to think differently because you will realize that you must master a trading advantage and only trade when the market shows you that control.

Forex overtrading summary

There will be moments of madness in any trader’s career, no matter what they read or do. Trading requires extreme self-control. If you can handle yourself, it will show in your results.

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