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Why You Should Avoid Overtrading (And How!)

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A common mistake that traders make is trying to take on too many positions at once.

They believe that a higher number of positions will translate into higher profit. “If I open positions in multiple pairs, one of them will win big.

The more setups you take, the better your chances of winning, right?

WRONG!

This isn’t the lottery, y’all!

If you want to maximize your opportunities and skills, you might want to think about being pickier with your trades.

For one thing, opening too many positions dilutes your capital allocation.

When you’ve done your research and are confident where price is going, wouldn’t you want to put as much as you can risk on the trade?

Don’t undercapitalize a 20% move just because you wanted in on a popular asset that can only grow by 10% in the same time period.

Overtrading refers to taking so many trade setups to the extent that you lose your market edge. That’s because you’re spending less time and research on each position.

Instead of skimming charts and tweets on eight assets, you could do multiple chart analysis, backtests, and talk to informed sources about where three asset prices could go.

The more information you have and the more scenarios you’ve prepared for, the less likely you are to miss opportunities and make emotional decisions.

Having a lot of open trades also weakens your focus.

Unless you’re a robot, you can realistically focus on only a small number of opportunities. Preparing for different market scenarios won’t do a thing for your account if you’re not around to execute the trading plan once they do happen.

One of my favorite trading psychologists, Dr. Brett Steenbarger, explains that the root of overtrading is the mismatch between one’s profit expectations and market volatility.

In other words, traders often feel the need to catch multiple market moves in order to hit their goals.

This kind of mindset may lead a trader to overestimate his trading skills in an effort to reach his targets and mentally convince himself that he’s had a good trading day.

You see, most of us have been conditioned to think that we must work harder and do more in order to achieve better results. While clocking in your 10,000 hours of deliberate practice has its merits, it’s a misconception to think that working harder equates to taking more trades.

Working hard means taking the best (a.k.a. high probability) trade setups.

Of course this is much easier said than done, so here’s one simple trick that can help you avoid overtrading:

Take only ONE TRADE each day.

That’s right, no exceptions. If you catch a big win, you’re done for the day. If you snag a loss, you’re done for the day.

Day trading coach and author Galen Woods calls this the One Bullet Action Plan.

Setting this absolute one-trade rule forces you to think like you have just one bullet left, which means that you have to aim properly and pull the trigger at the right time in order to make the most out of your only shot.

You must be extra picky in filtering out the “best” one for the day and at the same time be alert in catching the move.

At the end of the day, it’s our job as traders to get the maximum yield for the capital that we have.

While being picky with trades won’t guarantee consistent profits, it can definitely minimize losses and hopefully keep you in the forex game long enough to be consistently profitable.

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