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Overtrading Issues


Over the last few years, online trading in forex has become wildly popular, and a large number of traders around the globe are now coming into the markets to make money. While some of these investors are professionals who have experience in other investment markets, many of these traders are new, and have no prior experience investing in currencies.

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In any event, it is easy to see why forex trading over the internet has become so popular. You can make trades at any time of the day, you get access to leverage ratios which tend to be good, and you can also execute trades with a great deal of ease.

However, many traders have made the mistake of believing that trading is easy since access to the market is easy. This can be a fatal financial mistake.  There are a number of trading errors which can lead to consequences which are disastrous.

One of the biggest mistakes that a trader can make is overtrading. If you are somewhat familiar with forex trading, you may be surprised to find overtrading as one of the most dangerous mistakes a trader can make. You are probably thinking that just as with brokers in any market, you can earn your money through volume, so why should you be concerned with overtrading?

The answer to this question is simple, but profound: when your customers are highly successful, they will trade more, and over the long term, the volume will increase. While it is true that overtrading is a risk that is somewhat easy to avoid, it is important to remember that this form of trading comes in two forms.

Trading too many positions within a short period of time can cause a number of problems along with substantial financial risk. The financial risk comes because when you have too many positions which are open, you will use up the margin collateral which is very valuable, and this will occur within a short period of time.

Once this occurs, you may end up in a liquidation which is margin based when the prices turn against you. Once this occurs, the loss is essentially the result of overtrading in comparison to your margin. It is not simply a matter of being incorrect about the market.

When it comes to forex trading, getting trades right the first time can be difficult enough, but when you lower your flexibility by taking up too many positions, you can make things a lot worse. However, lets say that you have a substantial amount of money, and you have the option of holding as many positions as you choose.

Even in a situation like this, you are still subject to what is called strategic errors. When you run more than one position simultaneously, it will seem as though you have studied numerous currency pairs, and that you have a well put together plan for dealing with them. Unless you are making a trade with a model that is system based, this is very risky.

The Danger of Taking Up Multiple Positions

When a trader makes the mistake of using what I will call the "dartboard" method, taking up a lot of positions with the expectation that a few of them will return a profit, this shows that your strategy is dependent on hope as opposed to analysis, and hope gets you no where in the forex trading market.

It also shows that you are trying too hard to avoid taking a loss on a specific trade, and this is an additional mistake. Traders tend to do a lot better when they take the time to analyze a small number of pairs for potential opportunities to trade, picking the one which has the best potential. If you have the ability to do this for a large number of pairs, then you are highly skilled.

However, the second form of overtrading which can lead to major losses is when you have a position on the market which is open. At the bare minimum, this would seem to convey that the trade opportunity may be present within the market, and you are aware of what it is.

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However, it also means that you are continually being exposed to risks in the market. One thing that you must always keep in mind is that a skilled trader is always an individual who does not take risks which are unnecessary. You must be capable of finding market opportunities which are viable, and pick a strategy which is easier for you to exploit. If you are in the market all the time, then this is a sign that you are not focusing on the trade set ups which are properly defined.

Read Next: How to Avoid Trading Mistakes

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