Are You Overtrading?

Forex Smart Tools Newsletter ~ Volume Nine

Are You Over-Trading? Does It Really Matter? Take the Acid Test...

OK... what do you hear us say over and over again? Don't believe anything other than your own experience.

But you've got to analyze that experience carefully to be able to see what you're really doing.

One of these key concepts that forex mentors preach about is "DON'T OVER-TRADE" - but what does that really mean? To a swing trader and to a scalper, over-trading would look completely different. What does it mean to your style of trading?

We wanted to offer this lesson and the acid test to you because it has proven to be the most important ah-ha wake up call for us in our own trading this past year. It's made all the difference. Not the strategy - but the frequency... Wow!

Good trading to you all, Evelyn & Mindy
APs, Registered Commodity Trade Advisors    skype: forexSmartTools    twitter: @forexsmarttools

Lesson Nine - Part A: Take The Acid Test

Open 2 demo accounts, and fund them with the same starting equity.

Use the same Risk Profile for each account. The Risk Profile is the percent of your account you are willing to put at risk per trade - i.e. how much you could stand to lose without breaking out into a sweat. For those of you with the Calculator this is a simple setting you make once, which guarantees that you will not lose more than that x percentage on any one trade. For those of you doing this by hand – work it out honestly and carefully for each trade before you place it. If you don't know how to do this – stop trading right now. Seriously. Professional traders know this with exquisite precision before each trade they take.

After each trade you take, adjust your lot size for each account independently, continuing to use the same Risk Profile setting on each.

In Account One follow this rule: If I have a winning trade then I will place only ONE trade each day. If I have a profitable trade – I stop trading that day. If I have a losing trade, I will give myself one opportunity to make back a portion or all of the loss. If that make-up trade is a win, I will stop, even if I have not made up the entire loss. If that make-up trade is a loss as well, I will stop for the day. Add the additional rule that you only trade one currency pair in any one trade. (You can take your first trade in the EURJPY, and if it's a loss try to make it up in the GBPUSD, etc., but don't put on two trades simultaneously on two different pairs).

In Account Two follow this rule: I will place the same trade or trades that I do in Account One. If my setup occurs on multiple currencies, I can take simultaneous trades on any of them. After those trades are done, I will continue to trade for what ever period of time I want to sit at the computer, taking whatever additional setups meet my criteria. In Account Two, you are not giving yourself permission to become careless or undisciplined. You still want to apply the same rigorous decision-making to each trade that you normally do... it's just that there may be more opportunities than one a day that you see set up, and in Account Two you may take them.

Even if you're a scalper and have been taking many trades a day - try this test just like this. If you're a swing trader who stays in a trade for several days at a time, stretch out and adjust the concept of time accordingly, but keep the spirit of this test (yes, swing traders can over-trade too).

Do this for one month minimum - preferably two months.

Lesson Nine - Part B: Here's What We Found...

We set this test up for ourselves because we kind of sort of knew intellectually that trading less might yield more profit, but we love to trade so much that we didn't really believe it in our bones - we didn't believe it at a cellular level. So we traded every chance we saw a decent opening. Yet over the course of about six weeks - Account One, taking one trade a night, or two trades if making up an initial loss, was up 50% (wow!) – while Account Two that took every seemingly-good setup was down 40% (wow!).

For us... personally speaking, we REQUIRED seeing the results this graphically displayed to finally believe it and change our ways. We needed visible proof – like getting hit over the head with a 2x4 board to get our attention. Seeing this spelled out like this really helped us shift our behavior.

Will your results be like this? Who knows?! We don't – and neither will you, until you try it for yourself. Your style of trading may yield very different results.

If we hadn't created this test and held tightly to the discipline of doing it for two months, we would never have believed the results. There are always plenty of other reasons to blame for losing money in Forex, and this idea of frequency was never high on our list of excuses. Duh! We now see it as close to the top of all reasons why we used to have trouble.

Lesson Nine - Part C: Why The Difference?

One of our theories about why we saw these results differ so radically from Account One to Account Two is the attitude we brought to our trade selection. Knowing we could only place one trade a day made us get very particular about what trade we wanted to take. When someone buys our Smart Tools, they have access to our extensive Money Management video library, and in one of our training webinars we've mentioned this style of trading as being analogous to a sharp shooter who takes careful aim at one specific target.

We also notice that choosing to take only one trade a day helps us be very careful about the time of day we choose to trade. We have studied the market for when our particular setup yields the highest probability of working, and when we restrict our trading, we make sure we're using this prime time information. This analysis is easy to do using the Forex Smart Tools Trade Log. Here's a screen shot from the Summary page, in which any of our accounts can be automatically displayed as results per hour, as value won, lost and the net, and with the Pro verison 1.6 you can also see the win % of each hour bracket too:

Load Images to display Summary Tab


If you take the Acid Test, please write in to us to let us know what your results are. We love your feedback and shared experiences.

Risk Disclaimer

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.  There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair.  Moreover, the leveraged nature of Forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses.