This week’s question comes from David, who asks:
How can I stop overtrading?
When I first entered the Forex market in 2007, I was trading from the 15-minute chart. As you might expect, I was opening several positions each day.
I even went through a phase where I was waking up at 3 am EST for the London open. I enjoy getting up early, but not that early.
Part of the reason I was using the 15-minute chart is because I believed that more trades would equal more profit.
It makes sense, right?
If you can make two or three percent on a trade that lasts two weeks, why not make the same in two hours?
Boy was I wrong. Trading from the intraday time frames only served to deplete my funds that much faster.
You may have a similar story to mine. I would bet most Forex traders do.
The good news is, there are a few simple ways to avoid that type of situation altogether—not only by trading from the daily charts, but by using other techniques that I’m about to show you. They are incredibly simple, yet powerful enough to get you to stop overtrading.
Read on to learn how I stopped overtrading, and how you can too.
Are You Overtrading?
Before we get to the meat and potatoes of today’s lesson, let’s define what it means to overtrade.
Put simply, overtrading is the act of trading too frequently.
As you may well know, the best traders in the world exhibit an obscene amount of patience. That’s because quality setups take time to materialize.
The successful traders know this, so they stay patient and wait for confirmation.
It doesn’t matter if the setup takes three days or three weeks to materialize. What matters is protecting their capital, and they do this by waiting for confirmation before entering.
On average, I take between five and ten setups per month. That’s it!
To put things in perspective, I trade 22 currency pairs and stick to the daily time frame 90% of the time.
That should give you a good starting point if you watch a similar basket of currency pairs. If you do and you traded 40 times last month, there’s no doubt that you’re overtrading.
But you will know if you’re trading too frequently. When you exit for a loss but know deep down that you shouldn’t have taken the trade, that’s a strong signal that you’re frequency is too high.
And if you get that feeling multiple times each month, you’re most certainly overtrading.
Now that we’ve discussed what it means to overtrade, let me share a few simple ways to break the bad habit.
1. Plan Your Week in Advance
One of the best ways to trade less frequently is to plan your week ahead of time. I found weekends to work well for me.
When you do your analysis, be sure to identify potential setups. That way if something worthwhile does materialize, you will know that you’re acting on a plan and not making a spur of the moment decision.
Those who have tried this approach have told me their trading improved almost instantly.
What’s more is that those same traders admitted that they’ve lowered their stress and anxiety levels considerably since planning their trades in advance.
Instead of chasing setups throughout the week, they can just sit back and wait for quality setups to materialize. It’s a ‘wait and see’ approach that has worked incredibly well for me, and hundreds of other Forex traders.
2. Trade From the Daily Time Frame and Nothing Else
Let’s assume for a moment that you trade 20 currency pairs and utilize the 1-hour time frame.
That’s 480 candles to keep track of every 24 hours.
Granted, you won’t be at your computer for each one, but even if we cut that in half it’s still 240 candlesticks each day.
Compare that to the daily time frame where there are only 20 candlesticks in a 24 hour period.
Which environment do you think contributes to overtrading more than the other?
I think you will agree that keeping track of hundreds of candlesticks each day makes it much easier to fall victim to overtrading.
I’m a firm believer in keeping things simple. It’s why I got rid of indicators years ago and it’s also the reason I trade the daily time frame.
One of the most common concerns I get from people who want to join my community is the number of setups we get each month.
I get it. If you’re watching 20 currency pairs, that’s just 20 candles to look at each day. How on earth could you possibly trade enough to earn a substantial return?
You know what, though?
Trading less is a good thing. It’s one reason the daily time frame will improve your trading. By slowing things down, you’re able to plan trades ahead of time, which removes emotion from your trading.
It’s okay if you’re still not convinced. I do, however, ask that you give the daily time frame a try. For all you know it could be the missing link.
3. Give Yourself a Weekly Limit
A more unconventional approach to avoid overtrading is to give yourself a weekly trade limit.
Here’s how that works…
At the beginning of each week, give yourself a limit of two or three setups. Once you reach your limit, you must stop trading until a new week begins.
You can use whatever number you’d like. However, I would urge you to not exceed three setups each week if you are trading the daily time frame.
Using a weekly trade limit will do three things to help your performance:
- It will force you to plan your trades. Since you will have a limited number of opportunities, you will want to make sure each one counts.
- You will be less likely to give back profits. You’re most vulnerable after a winning trade. If you know you only have one or two trades left for the week, you’ll be more likely to stay patient after a win.
- You’ll be less likely to trade in the first 24 hours. Mondays are typically one of the worst days to trade, as buyers and sellers are still settling in from the weekend. If you know you can only trade twice that week, you’ll be less likely to use one up right off the bat.
4. Focus on Months and Years, Not Days and Weeks
Trading is a long-term endeavor. You won’t find consistent profits after a few days or weeks, much less massive success.
Yet this is how many Forex traders approach the market.
In fact, it’s the very reason overtrading is such a common issue among traders. Instead of being content with three or four percent profit in a month, they want thirty percent.
The three techniques we just discussed are mechanical changes you can make. In other words, they’re changes you can see.
However, without the right mental shift, those changes will fall flat.
So the next time you sit down to look at your charts, try to plan your approach based on where you hope your account will be in two or three years.
Don’t concern yourself with making thirty percent profit this month because that inevitably leads to overtrading.
As for how long it will take you to be able to trade full time, don’t think about it.
Focus on the process instead. Put your time and energy toward staying patient, sticking to the daily time frame and planning your week in advance.
Slow and steady wins the race. Even many of the legendary traders of our time started with just a few thousand dollars.
Overtrading is one of the most common and costly bad habits experienced by Forex traders. It’s easy to assume that the more you trade, the more you stand to make.
However, the opposite is true. Trading is a game of patience. Those who wait for quality setups and do nothing in the meantime are the ones who succeed.
One of the best ways to do just that is to use the daily time frame and nothing else. The limited number of daily candles will help you stay on the sideline while waiting for an opportune time to strike.
Try to plan your trading week ahead of time. I find the weekend works well. By doing your analysis and creating a watch list ahead of time, you’ll be less likely to chase subpar setups throughout the week.
Giving yourself a weekly trade limit is another excellent way to stop overtrading. Aim for just two or three trades each week. You will be amazed at just how quickly this simple change will improve your trading performance.
If you want to succeed in this business, you have to start thinking long-term. Don’t stress over one loss, or even a losing week. Instead, stay focused on how you perform over the coming months and years.
A long-term perspective will allow you to see the power of a ‘less is more’ approach.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.