Overtrading is a common error many traders face. We make a few profits and get excited and want to continue to trade. Profits can emotionally give you such a wonderful feeling that you want more of that feeling. Trader Beware! The market will take profits away if you cannot stay logical and follow your rules for trading.
Many times it can be beneficial to walk away from your computer long enough to assess your emotions. Many times it can be helpful to go do something else for a while such as go to lunch, visit a friend, be creative, live your life outside of trading. Besides, if you have set up your Business and Trading Plans and you have reached your daily targets, it is time to stop and come back another day.
The longer you stay in a trade and the longer you sit at your computer trading the markets, the greater the potential risk you are exposed to. Managing risk is a huge factor in a good trading plan. The better you become at following your rules and risk management, the better your trading can become.
Consider 4 major sets of rules for your trading plan.
- Identification of a Trade Rules
What strategy or trade set up are part of your plan? Moving Average Cross, Fibonacci Thrust, News? Know what you are looking for versus just waiting for anything to come along.
- Entry Rules
Are you an aggressive trader or do you wait for confirmation of a trade? Some of this depends on what strategy you are trading.
- Management Rules
Where are your stops? How much risk are you willing to give up for how much potential reward (Risk::Reward)
What position size will you use in relationship to your overall account?
- Exit Rules
Is this an ‘All in/ All out’ rule or do you scale out as you gain profits?
These are just a few questions to get you started. Rob Roy, founder of WealthBuildersHQ, is a very risk conscious trader and has some excellent rules for trading that have served him well over the last 20+ years. Come learn from a mentor who has already tested his rules of trading.