A Simple Way to Reduce Your Risk
I have heard from hundreds of traders around the globe, and there is one problem that is extremely common. This is the one constant hurdle that nearly every trader (including myself) must overcome. Avoiding this pitfall can drastically increase your profits and, quite often, the number of winning trades.
Most traders trade too often.
How often have you found profit with a few good trades, only to lose the profits (and more) by overtrading?
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There is one simple way for most traders to make more money and it is this – trade less often. By adopting a very cautious attitude toward the next trade you can be sure to avoid the very worst trades. This way you can increase your win percentage and as a result you may find that trading becomes more relaxing for you.
A simple change in mindset will often go a long way toward helping you overcome overtrading. If you approach the markets as most traders do, you may look at a few charts and think “where is a good looking trade today?” The focus is on the positive aspects of the potential trade. However, by adopting a more critical mindset you can reduce your trading activity and probably avoid low probability trades.
How do you change your mindset?
Adopt a critical attitude toward your potential trade setups. There are at least three questions to ask yourself before taking a trade. These questions will help you to reduce your trading:
1. Ask yourself this when looking at a potential trade “why should I take the opposite trade?”
If you can come up with at least two reasons to take the opposite trade, then you probably should give the trade a miss. The very best trades are not ambiguous.
2. When was your last trade?
If it has been some time since your last trade, for example, if you usually take one trade each day and you haven’t had a trade for 24 hours, then you are probably in a clear state of mind. If you lost on a trade with the GBP/USD an hour ago and you are hunting for a “revenge trade” then your thinking may be a bit clouded. Try to trade with a clear mindset, your trading account will be better for it.
3. Does This Trade Look Like Free Money?
If the trade looks like a perfect setup, if you are absolutely excited about the prospect of taking the trade because you have seen so many successful trades like it in the past, then maybe you should listen to your instinct. If it is one of those trades that you simply must take because you are convinced it is a great trade setup, then maybe it is a good trade to take. If you can get to a place where all of your trades feel like this, where it is more difficult to convince yourself to not take the trade that you really will have a difficult time walking away from the trade, then this is a trade to take. Once you feel like this about every trade you take you will see your trading improve dramatically.
A simple shift in your thinking from why you should take a trade to why you should avoid a trade is all it takes to overcome the overtrading hurdle. Join the group of profitable traders who trade less often and enjoy trading profits.
Walter Peters, PhD is a professional forex trader and money manager for the DTS private fund. In addition, Walter is the co-founder of Fxjake.com, and often coaches other traders. If you would like to learn more about Walter’s trading strategies, take a look at Walter’s upcoming webinar.