Does Your Forex Trading Plan Encourage You To Overtrade?

Welcome Ryan, the author of this Forex Project guest post. Ryan trades from a quiet country lake house and helps traders through his blog at http://www.ryanokeefe.com.

Does your trading plan encourage you to over trade?

Recently I started a survey on my website asking traders to answer this question:

“What is holding you back from trading successfully?”

Currently the number one answer is “I make some money, and then I give it all back.”

Multiple factors contribute to this result however over trading is the most frequent concern struggling traders email me with. I have some thoughts to avoid over trading I hope you’ll find useful.

Consider Your Trading Plan

Over trading may be baked into your trading plan without you realizing it. I received an email from a concerned trader who struggled with taking too many trades although they were following their trading plan. I asked to look at their trading plan and found it was built around the 60 minute chart, the opening of each trading session, support and resistance levels plus the MACD indicator. How many opportunities do you think their trading plan generated on a daily or weekly basis?

I’m a big fan of slowing things down with longer time frames. Using a longer time frame automatically reduces the number of trades you will consider which reduces your trading plan’s built in propensity for over trading. You won’t be tempted to take a “valid signal” 10 times a day trading a daily chart. The vast majority of my trades are planned on the daily chart with the entry taken on a four hour chart.

Consider a Weekly Goal

In my trading plan I have a weekly goal of 50 to 100 points. This is a realistic goal for me to achieve and having the number written down reminds me that once I’ve made my weekly goal there is no reason to place it at risk. When the goal is achieved it is time to do anything other than trade. If you’re trading a lower time frame I think setting a weekly goal is even more critical because as we have discussed, shorter time frames offer more “trading opportunities” which place your profit at risk. I’ve had this weekly goal established for years and it works well against over trading.

Some traders may think a goal of 50 to 100 points a week is too low but keep in mind there are as many ways to configure a trading account as there are ways to trade it. With the right mix of leverage, lot size and risk capital you can do a lot with a goal of 400 points a month. Most important is to set your goal according to your personality; whatever you believe you can achieve and doesn’t stress you out in the process is best.

Do you really need to take that trade?

Before I open a trade I ask myself this question every time without fail. It seems obvious but so is lowering the landing gear before landing yet some pilots still manage to land with the gear up. Consider your emotions before you take a trade. Are you tired? Are you angry? Did you miss a good trade and now desperate to make some pips? Have you made your weekly or monthly goals? If you have met your goals you don’t need to trade, period. If you can honestly answer this question with a “yes” then pull the trigger but if not, don’t put your capital at risk.

Be accountable to somebody other than yourself.

Rob Booker pitched this idea in a presentation I watched online and I believe it is the strongest action you can take to eliminate any propensity you have to over trade. Whoever you report to should have a basic understanding of your trading plan and be able to question you on each trade in a constructive setting. This is a full disclosure exercise so find somebody you can trust.

I report to my Wife every Friday morning with a print out of our account statement. We go through every trade while I explain what system I used, why I took the trade, what mistakes I made and what I could do better next time. We also discuss what I should be doing during the upcoming week if goals are already exceeded.

If knowing you need to explain why you put hard earned profit at risk for an unnecessary trade at the end of the week can’t keep you from pulling the trigger, nothing will.

Popularity: 81%

How Do I Begin Trading Forex?

I’ll assume that you have some knowledge about Forex either from a book or website.  I’m not going to give definitions of a pip or explain what a base currency is.  There are plenty of places you can find this information.   What I want to provide are practical lessons for the beginner, lessons that can help straighten the learning curve.  

There’s a lot of information out there on forex, some of it good and some of it misleadingly bad.  Be careful.  Trading forex is many times portrayed as a way to get rich fast; a home-based business.  This is the furthest than from the truth.  Trading forex is risky and though it may be possible to turn it into a home-based business, you need a lot of capital and experience.  To give you an idea, a very experienced and respected currency trader had the following yearly returns: 71% in 2004, 433% in 2005, 53% in 2006, and 30% in 2007.  Let’s just say for a minute that you were as successful as this trader and started 2007 trading forex as a home-based business with $5000.  Could you live on the $1500 you made in 2007? I doubt it.  I’m not trying to discourage you from trying but I think it’s important to be realistic.  If you dive into currency trading with unrealistic expectations, you’re not going to get far.

Maybe you’ve read a book on forex, read something about trading forex on the internet or you went to a trading seminar.  This is something that interests you, something you want to commit time to, initially as a hobby and maybe one day for a living.  After you have this basic knowledge, where do you begin? 

1. I’d recommend buying a book on forex because it contains a little of everything.  It explains what the forex market is and answers other basic questions.  In addition it should contain information on reading charts and technical analysis.  Read the book from cover to cover.  When you’re done, move on to step 2.
2. Download and install Metatrader which is a free trading and charting platform.  You will prompted to open a demo account after installation.  You can download Metatrader from any number of places.  One such place is http://www.interbankfx.com.  Start playing around with Metatrader to learn what capabilities it has. You’re not going to find a Metatrader book in your bookstore but you will find online manuals on the internet.  There is also a huge user community around Metatrader.  You can find any one of these communities by googling "metatrader forums."
3. Start applying some of the things you learned from the technical analysis sections of the book to your charts.  Draw some trendlines or add some indicators.  Start placing some trades also.  Don’t be concerned about how much you’re risking or whether you’re going to win or lose.  Just get a familiarity with how to place a trade.  There’s only two directions you can trade in, long (buy) or short (sell) but there are many currency pairs.  Try concentrating just for consistency on the EUR/USD, GBP/USD, USD/CHF, or the USD/JPY (the four most popular currency pairs.)

These three steps should keep you busy for quite some time.  Take some time to get familiar with it all then you can move on.   

Popularity: 85%

What Do You Think Is Holding You Back?

"You have been at this forex thing for a while now and still are not
achieving the results you had originally hoped you would achieve. What
do you think is holding you back?"

Simple question but nevertheless a good one that made me think.

I have been forex trading for almost three years, not a sophomore and
not a senior.  Three years ago I had high hopes of trading full time
within one years time.  These hopes faded as the reality quickly sunk
in.  The results I was hoping to achieve back then were just totally
unrealistic.  I’m a firm believer that trading takes experience so
there really is no way of rushing the learning process.  The more you
rush, the more chance you have of getting so discouraged that you want
to run as fast as you can away from the market.

After rethinking my initial goals, I limped around for quite a long
time.  I couldn’t even put together a profitable month.  During this
time, I got extremely discouraged and couldn’t even hope for achieving
anything.  I was probably two months away from quitting.  

Then about six months ago, I got my motivation back and wanted to
give it one more shot.  A lot of things seemed to come together quickly
for me and I felt good about my trading.  This was the point where I
felt like I could start setting realistic goals and I did.  Since then,
I think I’ve made great progress toward reaching these goals.  In fact,
I think I’ve surpassed the expectations I had six months ago.  

So in response to the comment, I think I’ve achieved the results
that I had hoped six months ago not three years ago.  In response to
the question, the only thing holding me back now is my renewed
motivation to excel in my non-trading occupation.  This was a bit
unexpected but one must have a backup plan.  I worked hard to get where
I am and I don’t want to throw it all away.  Ultimately, I want to work
for me and I think trading gives me the best shot at doing that.   

Popularity: 4%

What Is More Important In Forex Than Making Money?

I haven’t been able to make any progress monetarily in about a
month.  I’m up about 4% this month but breaking my account balance
all-time high has been a struggle.  I’m pretty much stuck where I was
around this time last month.  I’m not all that concerned and shouldn’t
be considering I was preaching patience a couple of days ago.  It’s
just that everytime I open my trading platform, the account balance is
just staring me in the face. 

It’s more important that I
progress as a risk-aversed trader.  For newer traders, it’s very
important for you to understand that learning methods to control your
risk should be a priority.  Making gains monetarily is obviously
important but making gains and strides elsewhere are more important. 
When I first started trading mostly with demo accounts, I had some
unbelievably profitable trades but my strategies were random and my
risk and leverage too high.  A lot of this is just pure luck and not
going to take you to the next level.  Your account balance shouldn’t be
used as a guage for success.  Some questions to ask yourself to guage
your success may be:

Have you managed to minimize your risk and maximize your reward?

Have you maintained consistency?

Have you been able to control your emotions?

Have you developed a complete trading system that you’ve been able to follow without deviation?

If you haven’t been profitable, have you at least been able to turn those gushing drawdowns into slow bleeders?

If you’re new to trading forex or have been trading for a couple of years, the #1 goal is to stay in the game as long as you can.  I’ve talked to many traders over the years and many of them have been in and outers.  They’ll jump in head first, blow up multiple accounts, and jump out never to be heard from again.  There are other traders I’ve known who couldn’t consistently turn a profit and instead turned into mentors or forex marketers.  Heed caution…  There are also others who couldn’t stand the non-regulation of forex and went back to trading futures or stocks.  There are a couple traders still around since I started but I can count them on one hand.  It takes years to become a trader and I can’t even say that for certain.  I’m still not there but I’m still around and giving myself at least 5 years.  If it doesn’t work out for me or you after 5 years, just think of the countless people who have gone to college and have never entered into the field of their degree.

Popularity: 3%

Be a Patient Forex Trader

Patience is a common trait among successful traders.  Unfortunately, patience isn’t inherent in many of us.  My belief though is that patience can be separated into two worlds for traders.  The first world consists of the patience you exhibit in your non-trading life.  I’ll be the first to admit that I absolutely hate to wait in lines.  I don’t discriminate against particular lines like waiting in line at the supermarket or waiting in line at the DMV to renew my driver’s license.  I hate all lines.  The second world consists of the patience you display when trading.  Here is where I show very good patience with intermittent lapses.  What I’m trying to stress here is that just because you don’t have patience in the first world doesn’t mean you won’t have it in the second.  I don’t believe they are conditional of one another.  So don’t assume that your won’t be a patient trader if you have no patience outside of trading.

With experience, you can learn tricks that will help you develop more patience.  For me, I just stopped watching charts.  I’ll scan them in the beginning of the day but I don’t have the desire or time to watch every tick.  I also stopped letting myself be influenced by what others were saying.  Every month I’ll hear everyone talking about trading the NFP report and every month I’ll ignore it.  Just because everyone is talking about trading it doesn’t mean you have to. Other things you can do and think are increasing your preferred time-frame (ie: from 30-minute to hourly) and knowing that there will be more plenty more trading opportunities in the future if you miss a trade.   Your trading patience doesn’t have to emulate your non-trading patience.  It may take some time to separate the two but you can do it.  

Popularity: 5%