Knowing When to Stop Trading

Forex Trading | by ForexCycle.com | Tuesday, 24 February 2009 16:05 UTC

The worst thing a trader can do is lose control while on a winning streak. This is where trading in the foreign currency market is similar to gambling. Players who do not know when to stop end up losing everything. This is what we call overtrading. It represents the biggest threat to traders and accounts for the number one source of losing money in markets.

Despite this fact, a large majority of traders continue to overtrade. This applies even to those who buy and sell within the same trading day, i.e. day traders. It is completely unnecessary to trade every single say or even throughout a given day. However, good traders know how to choose only the most advantageous trades and thus avoid unnecessary losses. Indeed, highly professional traders are distinguished by their ability to know when not to trade.

Overtrading is particularly tricky because it is hard to tell when it is taking place. It may refer to the amount of contracts being traded, the frequency, number of positions or even just spending too much time following market trends.

Experienced traders will reduce the size as soon as they suffer losses or an equity drawdown. The amount of investment for a given entry must be determined with regard to a sensible anticipation of its possible return. There is no one-size-fits-all solution and, since every trade is unique, it must be assessed individually.

It is generally difficult to say with absolute certainty which is the optimal number of contracts you should trade. Nevertheless, every time that it is possible, you should endeavor to trade not less than two contracts. The idea is to have one contact which will serve to compensate for expenses and one more to provide you with earnings. It is usually not desirable to trade only one contract, unless you are trading options.

Day traders who would usually trade five contracts should consider trading less if it is late in the evening, the reason being that there is not sufficient time for the trade to evolve as there would be if it had been performed in the morning.

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