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One of the more common questions when it comes to trading the Forex market is, “how many trades should I be taking in a given month?” Unfortunately this isn’t as easy to answer as some might hope.
On the surface, there’s no right or wrong answer as it depends on your style of trading, among other things. However there is, to some extent, a right or wrong answer relative to your style of trading. In other words, if you tell me that you trade the higher time frames and you aim for fifty or more trades per month, I can easily assume that you’re over-trading.
How did I arrive at that assumption?
Because the higher time frames simply don’t produce that many favorable trade setups each month, at least not for the way I teach Forex trading.
But here’s what is more alarming about the topic of over-trading – the majority of traders have no clue how many trades they take in a given month. I know because I talk to dozens of traders on a daily basis.
Think about it. When was the last time you sat down and critiqued your style of trading all the way down to the number of trades you take per month? If you currently do this, give yourself a pat on the back. You are among the few.
In this article we’re going to tackle the controversial topic of the ideal number of trades a trader should aim for each month. While there is no “one size fits all”, there are some best practices that you can follow.
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I will also share with you a simple rule that I used to help reduce my trading frequency when I first started trading the higher time frames. The rule is extremely simple, yet it helped me to focus on quality over quantity and can help you do the same.
First and foremost, the time frame you trade will, to some degree, dictate how many trades you take each month. This is because the ebb and flow on the lower time frames is much faster than that of the higher time frames, thus providing you with more opportunities to trade. But that doesn’t mean that more trading opportunities will equal more profits. More on this later.
While these additional trading opportunities do not necessary mean that you will take more trades, they do give you the option to take more trades. Whether or not you should actually take those trades is a completely different story, however.
The second and more influential factor is your style of trading. Here at Daily Price Action we look to trade swings on the higher time frames using simple price action strategies and patterns. So naturally the number of trades we take will differ from a trader who looks for scalping opportunities on the lower time frames.
So what is the magic number? To be completely honest, there isn’t one. There are far too many factors that influence the number of trades you should take in a given month to claim that there is one number that will work for everyone. Those factors include everything from your style of trading to the overall market conditions.
That said, for the way we trade the higher time frames there is a general rule of thumb you can follow.
The rule is this – if you find yourself taking more than two setups per week, chances are you are over-trading. It’s really that simple.
Of course when I say “higher time frames”, I’m referring to the daily and four hour charts. If we extrapolate this out to a monthly view, it equals approximately 5 to 10 setups per month. This is of course a general guideline and is not meant to be a hard and fast rule as every trader needs to find his or her “sweet spot”.
Over the years I’ve found that any more than ten trades per month on the higher time frames will get you in trouble. This is because there are only so many “A+” setups that form in a given month. These are the setups that stick out like a sore thumb because they are well-formed, have confluence and provide a favorable risk to reward ratio.
Before we move on, I want to reiterate that the numbers above are a general guideline. I’m also assuming that you are trading at least ten currency pairs, which tends to be the case for most Forex traders I come across.
I have previously written about the idea that less is more when trading the Forex market. Generally speaking, the fewer trades you take, the more profitable you become. Of course there are many other factors that dictate whether or not you are consistently profitable, but taking fewer trades is certainly one of them.
Why is this?
Taking fewer trades forces you to be more selective about where you risk your capital. After all, your first job as a trader is to protect your capital, making money comes second.
So if your first job is to protect your trading capital, then the selection process to determine where you will risk that capital becomes paramount. You have to view your Forex trading as though you are a gold miner in search of gold buried underneath huge piles of dirt. You are going to have to move a lot of dirt to find that gold, just as you have to look through a lot of charts to find favorable trade setups.
Now that you know why less is more when trading the Forex market, you’re probably curious about the best way to make such a drastic change to your trading habits. Of course you could simply tell yourself to take fewer trades, but that isn’t a very concrete way to go about implementing change.
I’m going to share with you something I did when I first began trading price action in 2010. I made a rule that I was only allowed to put on one trade within a 24 hour period. This meant that if I put on a trade today, I wouldn’t be able to trade again until tomorrow. It didn’t matter if the trade went for or against me.
To clarify, this didn’t mean that I had to trade every 24 hours. Quite the opposite, in fact. It did mean, however, that I was not able to trade for a minimum of 24 hours following a losing trade or even a trade that was in profit.
I made this rule for myself because I had a bad habit of jumping from position to position. If a trade started to go against me, I would exit and move on to something “better”. I later learned that the saying, the grass isn’t always greener on the other side had a lot of merit when trading the markets. In most cases I would look back at the position I closed prematurely only to see that the market had run into what would have been profit for me.
This taught me the importance of giving the market time to play out in my favor. All the favorable setups in the world won’t help you become consistently profitable if you don’t give them time to make you money, and that’s exactly where this rule can help.
Regardless of the time frame you trade, being patient and allowing the favorable setups to come to you is paramount to your success as a Forex trader. Over-trading is a bad habit, and one that holds most traders back from seeing their trading account grow consistently.
The worst part about this bad habit is that it’s camouflaged by your ego. Your ego loves to tell you that more trades will certainly equal more profits. It also tells you things like, “you can’t make money if you don’t play the game”. In truth, part of “playing the game” involves knowing when to sit on the sidelines.
The very best defense against your ego telling you to trade more often is a written rule like the one I mentioned above. But just like anything in life, it takes practice to get it right. The more you practice restraint as a trader, the more profitable you will become as you begin to trade only the most favorable setups.
How many trades do you take per month on average? Do you think you could benefit from reducing your trading frequency?
Share your experience or ask a question below. I look forward to hearing from you.