Overtrading: Why it may be vital to take a step back - DailyFX Tips & Picks

WHEN trading the markets, you might think you only have two options: buying or short-selling. But there is a third option – not to trade. It’s an interesting concept, as many people believe that you need to be in the market all the time to make money. Yet this is far from the truth – trading is not like a regular job where face-time is important.

Trading when it matters is key. But often, traders find themselves in the opposite situation, trading to the extent that it becomes counter-productive – something we call overtrading.

Overtrading can quickly develop a negative feedback loop for a trader, but there are other reasons to take a break that are related to changes in market behaviour. A recent example of this is the current EURUSD bounce, which was unexpected. Just about everyone expected EURUSD to reach parity, but then US data turned soft and, more importantly, we got a strong reprising of the German bund.

An investor short-selling the euro throughout this period would’ve needed to run for the hills. We know better in hindsight, but few people picked up this change in sentiment. This means that booking a loss on the reversal was fair, and part of the game. However, consistently shorting on the way up in the EURUSD is clear sign of overtrading. Taking a break from the market after a loss or two would have been the prudent thing to do.

My message is simple: when your losing streak extends longer than usual, take a break and reassess after a few days. This will ensure that you keep the powder dry for when the markets agree with you, and you will be in a position build your account.

Alejandro Zambrano is a currency strategy analyst at DailyFX.com.