Forex Trading Articles
WHY TRADERS OVERTRADE?

Forexmentor Team
© 2006, Currex Investment Services Inc.

Dec 31, 2006

Ari Kiev suggests a few possible explanations in his book "Trading to Win". Some traders may overtrade just to gain some sort of involvement. They can't sit still and do nothing. It's as if they think, "An active trader trades all day."

If you hold this belief, you will tend to feel you are missing out on something if you stand aside and do nothing. Other traders try to reach high performance goals, and feel that unless they make trade after trade, they have no chance of reaching them.

Professional institutional traders, for example, must make profits to stay employed. Sitting around doing nothing doesn't make them think they can make a profit. When you fail to reach your performance objectives, there's a powerful motive to make trades just to feel you are making some progress.

What often happens, however, is that bad trades are made and losses are mounted. In addition, while one is engaged in these loosing trades, he or she is not searching for solid, high probability setups. In the end, profits objectives are missed completely.

Personality may be an issue for some traders. Traders with an impulsive temperament may crave the excitement that excessive trading brings. While others may overtrade to cope with a general frustration they feel in their lives. For them, putting on trades is like playing the lottery - every trade brings hope of success and fulfillment. 

Dr. Brett Steenbarger in his book "The Psychology of Trading" suggests that overtrading may be the result of daydreaming. Traders want to have a feeling of power and control, but the markets are difficult to control. Daydreams allow a fearful trader to feel powerful. Dreaming that you will make huge winning trades allows them to feel better. But many times, traders start believing their daydreams. And when daydreams start to seem believable, they may wrongly believe that all they have to do is put on trades and they will be profitable in the end. Even though commissions are relatively low these days, you can still end up paying unnecessary commission costs by overtrading. In addition, some of those small, seemingly insignificant trades can become significant if you lose perspective and invest too much money on a trade that is a bad idea.

One of the best solutions to overtrading is to be brutally honest with yourself. Evaluate your trading ideas and make sure that you have sound reasons for putting on a trade. It's useful to develop and trade very detailed trading plan. You must have a written plan that defines all aspects of your trading, and you must commit to following that plan to the letter.

• Define your criteria for entering and exiting trades as precisely as possible.
  
• Identify the signals or indicators you will use to monitor the trade, and anticipate which indicators will signal when a trade is going against you.

If you have a trade going against you, the solution is very simple, get out because you can always get back in. Never let a looser get out of hand. As traders, we must accept the fact that losses are to be expected.

If you trade good setups with a confluence of events, and avoid making trades on impulse, you'll increase your profits, and feel good about how you are productively using your time to make those profits.

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