So as I move into swing and position trading, I want to begin with discussing the subject of overtrading. Since more pips will usually be at risk in these longer term trades, taking on too much risk and overtrading can really harm results.
I’ll usually enter day trades with very tight stops of 15 to 30 pips. The fact is though, as soon as a trade moves about 6 to 10 pips against me right after entry, I know it’s no good and I will exit early and try for a better entry on that pair or another. After a trade has been running for a while and is well into the positive, I don’t worry about it being a bad entry because it has already proved to be good. We trade our beliefs about price. Certainly I don’t believe price will move 6 to 10 pips against me on entry, or I would have waited for a better entry. If price moves 6 to 10 pips against me on entry, my belief about which way price would move right after entry has been invalidated and I will quickly exit any time my belief about price is invalidated. The stops of 15 to 30 pips are only there to protect against the quick spikes that often occur at lower timeframes. If you have the discipline to exit as soon as price moves differently than you believed it would, even running a stop of 40 to 60 pips wouldn’t have much effect on whether you stay in a trade or not. So within 30 minutes or so after entry (and maybe 10M or less in a fast market), if price moves 10 pips negative against me, I exit. It was a bad entry by definition. Maybe it will come back, maybe it won’t, maybe pigs will sprout wings and fly. It doesn’t mater, the price isn’t behaving according to my belief about it, so I just exit and try again. This is a matter of trading discipline and it must be mastered to be successful. This is just my personal rule that I have found to be effective from my own post-trade analysis. You may find others that are more effective for you, but of course, you won’t find them if you don’t look for them.
I also set limits and objectives in my trading plan to prevent overtrading. In day trading, I will not allow more than two entry losses in the same pair in a day. So that really winds up being a max 10 pip entry loss plus spread, say 3 pips, or a max of 26 pips lost in a single pair per day. After losing two entry attempts in a single pair in a day, that pair is put in the cooler for the rest of the day no matter what.
I also have a maximum number of trades per day that I allow in day trading set at 5 trades per day max in my trading plan. Whether a very small entry loss, or a huge win, every trade counts and when the count hits 5, I’m done for the day, win or lose. It’s amazing how much your trade selection improves when you set a maximum number of trades per day to be allowed in your trading plan.
I have a loss limit set at 50 pips. Any day I lose 50 pips day trading just can’t be defined as a good day. I’ll quit and study the rest of the day when that happens.
I have a profit target of 500 pips per day. Of course, many days I don’t make that target, but many I do. I like to have a stretch target and that’s where mine is set now. You should set your own based on your own post trade analysis. Your profit target should be hit 50% of the time. If you are hitting it less, it should be lowered. If you are hitting it more, it should be raised. But I don’t necessarily quit trading right on 500 pips. I will allow a give back of up to 10 percent max of my daily profit target, before quiting, so say I hit 560 pips after a few very good multi lot trades, I must quit if I give back 56 pips on other trades for a final profit of 504 pips that day. I almost always will hit my max trade limit for the day before hitting my max give back after profit target, but it’s there anyway to protect my daily profits and I’m glad it is.
These limits and targets have been devised for me by me to prevent overtrading. I can’t say what the best ones for you are without carefully examining your trading logs and journal and that’s work you need to do for yourself. You may find additional limits and targets improve your trading beyond this simple bare minimum set. This post trade analysis is something you need to do briefly at the close of every trading day and in detail every weekend while the market is closed. If you aren’t doing it, I’d bet my account that you are losing and giving back more pips than you will after you try it. You can find more information and ideas on setting good trading limits and targets with a Google search.
There must be at least 20 methods to stop overtrading your Forex account and I’ve probably tried most if not all of them. You can just google stop over trading Forex or something like that and read about them all. I have made most trading mistakes at least 5 times, but this one takes much more work for me to avoid than any other. I’ve probably done it 5000 times in my career and only recently within the last decade gotten it well under control. This will destroy your profits and continually eat away at your trading capital.
You must evaluate your trading honestly to be successful. If you see any overtrading at all in your trading, you must put in whatever effort necessary, including halting trading altogether if necessary, to eliminate it completely from your trading. This pip eating monster must be killed for ever and never allowed to raise it ugly head in your trading again. It’s probably 1000 times more important to stop overtrading than it is to make a good entry. If you have overtrading in your account and are putting in huge effort to get better entries and no effort to eliminate overtrading, you are doing it just backward and need to rearrange your priorities.
Some of you have some serious work to do on your plan to prevent overtrading. I’ll help if I can, but you have to do your own work on this. The good news is, the longer you work on these things, the easier they become and the better results you have.
Postscript Note: Here is just one article on overtrading pulled off quickly from a Google search. It doesn’t offer as many solutions as many others, but it does echo the dangers of overtrading
