The Danger of Over Trading
Most traders know that over trading is a dangerous thing. It is something that most people would want to avoid but just can’t come to resist.
The question is “Why do traders over trade and when do they have a much higher propensity to over trade?”
I believe one of the things why traders over trade is because of the inability to control emotions after winning a trade and seeing the trade rise some more. This usually gives the trader a feeling that, hey, I could have made more if I had stayed in the trade then if I had taken profits. Seeing the extra pips that could have been made after taking the profits gives the trader a feeling that propels him to take revenge by taking another trade in order not to “lose out”.
Another possible reason why traders over trade is actually due to a human tendency to always want more. Human beings by nature would see more benefits with having more than having less. Just look at yourself and the people around you. They strive to have a bigger house or a second house, a bigger car, a more luxurious one, a bigger yacht, more hand bags for the ladies?
The list goes on. Human wants can never be satisfied.
As such, this trait follows us in trading. When we trade and we make money from that first trade and we make more money from the second and the third trade, all happening within a one hour time frame, we just feel that we can do this and make more and more money from the markets not realizing that the 3 trades we made was from a rising market and that the market is due for a correction soon. As we allow ourselves to be consumed by wanting more, we inevitably get ourselves in a condition which causes us to over trade. When the equation sees emotions being greater than rules and analysis, we will have a tendency to take a trade that might just result in a big loss.
The situation is made worst for beginner traders. New traders have to watch out for the 3 main dangers in trading. First, of over trading, second of ensuring proper trade sizes and 3rd of maintaining a proper stop loss strategy.
So what is the solution to this problem?
The answer is being disciplined. You must remind yourself to be disciplined when you have a winning streak. This will cause you to be over confident and take trades without using the right methodology and following your rules.
Always check yourself before you click to enter a trade. Ask yourself whether are you trading because a certain signal is given or i is because you have grown over confident and think that you have gamed the market. Over confidence is never good if you are trader. It may just get you to a position of no confidence if you are not careful as a forex trader.
The temptation is always high as a trader because as humans, we are easily tempted by money and the possibility of making more money.
If you really want to succeed as a trader, you need get yourself emotionally disengaged from money. You cannot look at the screen and after seeing that you have to take a loss based on your rules, decide to wait a little longer because you cannot get yourself to take the loss. You tell yourself, “Hey, that is a loss of $1000. I can buy myself so many things with that money. I think I can hold on a little bit longer and the trade might get better.”
Please understand that the market does not know you and it will move where it wants to move. If you have too strong an emotional connection to money that you trade, then I am sorry to say that you are just not ready to trade that money that you have. Its better if you just spend that money than trade as an unwillingness to take a loss after over trading means that your whole account can be wiped out.
I hope that there are learning points in this article for you.
I have gone through trying times myself as a trader and I belief that trading successfully requires determination, patience, and experience that only time can give.
I wish all the best in your trading.
-TAMIL(FOREX/COMMODITY/STOCK MARKET ANALYST)