Over and Under-Trading in Forex

Tuesday, January 31, 2012
Following a system is a key component of succeeding at Forex, but there is really more to it than that. Your Forex system has to not only work, but be balanced-it has to be something which you can integrate into your real life, and which won’t cause you to trade in imbalanced ways. Two common problems which Forex traders face are under-trading and over-trading. While some Forex traders under- or over-trade because of trepidation, impatience or other psychological factors, many do it because their systems tell them to. How do you fix under- or over-trading when it’s built into your trading system?

Oftentimes, over-trading and under-trading are built into a system because of the context of that system. It isn’t necessarily your entry or exit rules which are causing you to take too few trades or too many — it may be that you’re looking at too many currency pairs or not enough currency pairs. Or perhaps you’re trading on a Forex timeframe which is too slow or too fast. It’s very common for new Forex traders to trade faster timeframes than they need to or should starting out, for example. If you trade a fast timeframe when you’re starting out, not only will you be inundated with more trading opportunities than you necessarily can handle, but you’ll have less time to make decisions in and, more relevantly, less time to patch up mistakes. Does this mean you have to trade a slower timeframe? Not necessarily; not every personality is suited to having all that time to think (and double guess). And again, not everyone over-trades. Many people under-trade Forex as well.

If you’re taking on more Forex trades than you can handle, consider dropping to a slower timeframe (test this first) or dropping a few currency pairs. If you don’t feel overwhelmed with information, just with trading, consider imposing some rules on yourself so that you only take a certain number of trades in a given timeframe. Then pick only the very best setups (which is what you should be doing anyway).

If you aren’t trading enough to turn a good profit and your system isn’t signaling you to take any more trades than you are now, think about moving to a faster timeframe (only if you feel comfortable doing so — and don’t forget to demo it first), or looking at more currency pairs. If you’re only taking A+ Forex setups, you’re on the right track, but you may be able to find more trades of the same high caliber simply by looking at more currency pairs or a faster timeframe where more setups form.

These are just a couple of ideas to consider which may help you to improve your Forex trading. A lot of people don’t think of simply changing the context of how they trade, and wonder if they need to revamp their whole system. It’s often not the system that’s not working, however. You may just need to change the way you apply it.

How Forex Trading Checklist Can Help You

Sunday, January 8, 2012
You’ve probably read about how a trading system and trading plan are indispensable components of your trading. Indeed, if you don’t have some kind of system or method which tells you when to enter and exit trades — get one. A checklist for trades can be a part of your trading plan. Your trading plan will help you organize when you watch the charts, when you trade, what timeframes you look at, how you manage your money, how you work with alerts and more. While your system probably has your entry and exit rules and target profit and stop-loss rules, it probably doesn’t have a full list of things to keep in mind as you trade. Nonetheless, this needs to be part of your trading plan.

Why make a trading checklist to help you keep track of what you’re doing? Trading real money (or even demo testing for some people) can be very stressful. When you’re dealing with your emotions and working on making trading decisions, the last thing you want to do is forget something simple just because it isn’t written down. A trading checklist helps you to make sure you consider all contingencies.

For example, you might have a checklist for entering a trade. This is a checklist you look at after you find a setup identified by your entry criteria and before you actually hit «buy» or «sell.» You might ask yourself whether the context around the trade looks good (unless this is already part of your entry criteria). You could also make sure you’re investing the correct percentage of your account (obvious, yes, but remember, if you’re frantically trying to place a trade to catch a move, you may not look carefully at what you’re doing — especially if your trading platform is confusing, and many are).

Some questions to ask yourself while in a Forex trade might include:

  • Did I set my alerts?
  • Have I identified important pivot areas where price could hesitate?
  • Is a new price formation occurring? Does it conflict with the old one? Are my signals telling me to do the opposite of what I’m doing now? Do the original reasons for the trade still exist, or not?
  • Am I in a retracement or an actual loss?
  • What is price doing at a higher or lower timeframe? Is the context for the trade still good?
  • Am I in a weekend trade? Do I need to move my stops to avoid being stopped out by the weekly gap when the market re-opens?

This is just an example — what you put in your checklist could vary quite a bit. Your checklist could include not only considerations about the trade itself but considerations about yourself. If you have a tendency to hang onto losing trades when you should let them go, you could even ask yourself in your checklist if you are doing so, and include a reminder about the ways in which your emotions tend to impact your trading. Your checklist not only checks your trading, but also checks you. It’s a form of accountability, and it makes trading much easier to manage when emotions run high.