Overtrading Without Really Knowing It

Filed under: Learn Forex Trading |

 

If you have been reading these daily forex-related articles for a while, you should know by now that money management (and by association, risk management) is key to being successful in the forex currency markets. However, there are sneaky ways that the market can get you to overtrade without you really realizing it.

 

A good rule of thumb is to never have more than 6% of your bank exposed at any one time (as proposed by Alexander Elder in his famous book – ‘Trading for a Living’). This means that if you are risking 1% on each trade (i.e. you have a bank of $10,000 and you risk $100 on each trade), then you can only have six trades on at any one time.

 

However, if you do have six trades on at the same time, you should check that they are six trades that are very different. For example, if you are trading a wide range of the currency pairs, you could end up with a situation where you are trading very similar setups. Some pairs are very similar to others – such as the USD/JPY and the GBP/JPY pairs. As such, you could be basically putting the same trade on twice or more, and if the Japanese yen were to suddenly weaken or strengthen, two of your trades could suddenly get their stop losses hit. In a way, by doing this, you are not risking 1% on each trade, but in effect, risking two or three percent on one trade setup. This can cause volatility in your trading bank – so you should watch out for pairs that move in a very similar way and produce the same setups.

 

Needless to say, you should never really be risking more than 2% on a single trade, as this can severely damage your trading capital.

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