Don't Overtrade

Here is a little excerpt from a Pipsychology article posted some time ago:

"Don’t overtrade. Focus on the quality of each trade, not on the quantity. One of the hardest lessons for a trader to learn is not to overtrade. You will lose BIG if you continue to overtrade. Every time you enter the market, you expose your capital to the market. The more you expose your money to the market, the better chances your money will part with you. Also, the more you trade, the more execution costs you pay, mainly the spread.
The most common misconception among new traders is that they have to constantly be in the market. Wrong."

You can read the rest of that article here.

This used to be one of my major problems when I first started trading, especially because I was mainly an intra-day trader. I constantly felt like if I wasn't in the market, then I wasn't able to make money. In actuality, I would've SAVED myself a ton of cash if I had focused more on the quality of my trades, rather than the quantity.

The reason I bring up overtrading is because, yes, I've learned to control my emotions and not trade on impulse. But the question that you will eventually ask yourself is, "Am I being so cautious about overtrading that now I'm actually "under" trading?" There is that fine line between waiting for a good trade and not knowing when to pull the trigger. Often times you can have a feeling like you are missing many trades because of your fear. The reality is that you cannot control the market. You will never be 100% correct. The key is to find a trading environment where you give yourself a good probability of a winning trade so that once you are actually in a trade, the rest is smooth sailing.

I haven't spotted a good medium-longer term trade in quite some time now and even I have asked myself if I am "under"trading. Am I so scared of what is going on in the markets right now that it prevents me from pulling the trigger and missing out on some trades? The answer is, absolutely! I am scared! But with good reason. The EUR/USD, which is the pair I trade the most has been in the most unbelievable slump I've seen in a while. In this fundamental tug of war between the Fed and ECB, I AM scared to get caught in the middle. A majority of my trades come from this pair and right now the market is just flat, which leaves me on the sidelines. So am I really missing much? Sure I might miss a few trades, but I'm also giving myself a peace of mind knowing that now is not the best time to attack. Waiting is the name of the game right now and I must adapt to what the market is doing.

Even when I posted yesterday that the USD/JPY was showing a better fundamental trend in favor of the US, I was corrected by today's report that the Bank of Japan actually might raise rates again before the year is over. Fundamentally, I am in gridlock again, but with the technicals, I still see some potential trades.

Because of today's statements by the BOJ, the Yen gained ground against the Dollar and now we have a slight retracement from the 20 day high. This is what I was looking for. I'd like to see one more day of retracement and then see whether or not the USD can resume its trend. If the Dollar can break the 20 day high it made a couple days ago, then I will enter long.

Conversely with the USD/CHF, the dollar took out the 20 day high and made a new 20 day high in today's session. Once again, I want to see some retracement first before thinking about going long. The AUD/USD also made a new 20 day low today so again I am waiting for some retracement. Now I could be wrong on both pairs and they could just keep moving in the directions they are currently going but thats ok. I can accept that. I'm more comfortable waiting for a retracement before jumping right in.

Tomorrow looks to be another boring day with the EUR/USD as there aren't many important economic reports coming out. The only thing that I think might potentially move the market is the Retail Sales report at 8:30 am EST. Be prepared for more range bound movement.

So in conclusion (I used that phrase all the time when I wrote essays), I come back to the first point I mentioned earlier. How do you classify whether or not you are overtrading or undertrading? The answer is that it depends on the market. The market may be so chaotic that you stay out for a month. Is that undertrading? Not necessarily. In fact you probably just saved yourself a boatload of money. Then again, there might be a strong fundamental trend and you can find trades every day. Is that overtrading? Not if there is an overwhelming bias towards one currency against another. Know what type of environment you are in and roll with the punches. Trust your gut and don't worry about it too much. Pick your spots and always make sure that you put yourself in a place where you have a good PROBABILITY of taking in a nice profit. Then, relax and let the market do the rest.

Happy trading everyone!

-BP