You’ve probably heard it more times than you can count–you need to have the right trading psychology if you’re to succeed trading Forex or any financial vehicle for that matter.
If you don’t get it, we highly recommend that you seriously understand why your mind matters when making money.
As American hedge fund manager Tom Basso said, “investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.”
Mastering the right mindset is also your best weapon against overtrading. The last thing you want is for your trading journey to be riddled with excessive trading activities that have more losses than wins.
What is overtrading?
Overtrading, also known as churning, is when you buy or sell financial instruments excessively. This is an activity where you’ll end up with too many open positions and spending money disproportionately on a single trade.
While overtrading isn’t illegal, it can damage your portfolio significantly. This is because it usually happens when you deviate from your trading plan due to a negative or emotional reaction against the market.
What is the cause of overtrading?
Overtrading often happens due to FOMO. Because you don’t want to miss out on potential profits, you open a trade outside of your trading plan. The same is true if you’re chasing your losses.
It can also be triggered by excitement as markets move quickly and by greed. Who doesn’t want to make more money when an opportunity is there, anyway?
What makes overtrading deceptive is the fact that you won’t even notice you’re acting on impulse outside of the plan and driven by an urgency to profit until your portfolio suffers.
Think of this as a hunter who started patiently waiting for his prey, which was the original plan, but ended stalking his prey due to a subtle shift in perception. It’s possible that the hunter became bored or is running out of patience.
How do you overcome overtrading?
Because overtrading expose your portfolio to several risks, it’s important that you avoid or keep it under control. The moment you realise you’ve become afraid of missing out and excited and greedy enough to trade outside of your plans, you should do the following:
1. Embrace the uncertainty of the outcome
More often than not, overtrading is spurred by the need to control the outcomes of a trade. You want to keep the ball rolling or earn more profit even when you end up trading against the strategies you follow.
However, if you accept the fact that you’re never in control of how your trade will turn out or the market, you’ll have more control over your emotions and reactions whether you win or lose.
2. Remove emotions out of the equation
When trading, your decision should be based on clear analysis and made rationally rather than emotionally. Emotional investing and trading come with risks that you must avoid if you want to remain profitable.
3. Diversify your portfolio
If you want to open more positions, doing so across different investment classes could minimise and spread risk. Through diversification, you can profit from stocks, lose on Forex, and still maintain a well-balanced portfolio.
4. Don’t risk more than necessary
In Forex, risking 2% of your total trading capital is highly recommended. If you lose, your loss won’t be so painful. A 2% loss from your $5,000 capital, for example, will only cost you $100. Risk per trade should only be a small percentage of your entire capital.
5. Develop the right trading mindset
If you’re to overcome overtrading, you should think like a trader with no room for emotions. You need to train your brain to think rationally in every situation. How do you do this?
- Under the key characteristics of a winning trader and develop/practice them.
- Keep a trading journal so you can identify your mistakes and areas in your strategy that needs fine-tuning.
- Observe successful traders, replicate them and learn from their mistakes.
- Control your emotions at all times and in every situation.
Most importantly, always remember that risks are part of trading, no one is in control of the market, and even seasoned traders make mistakes.
