How to Avoid Overtrading with a Managed Forex Account – Overtrading occurs when a trader or broker exceeds their strategy’s limits, driven by the urge to trade without following their plan, leading to poor results. To avoid this, you can update the plan with stricter entry and exit criteria.How to Avoid Overtrading with a Managed Forex Account is important to secure long-term profitability and minimize risk. Overtrading, as it most often arises in response to emotional decisions or an excessive desire for speedy profits, can sharply drain your capital and eat away at the potential gains of even the best-managed forex account. While the professional managers deal with your account, that doesn’t mean one shouldn’t check whether they are overtrading, because that may bring losses which are completely avoidable. You can protect your investments and yield a steady growth by recognizing indications that specify overtrading and dealing with a responsible manager.
Definition of Overtrading in Forex
Overtrading usually originates from panic among Forex traders when a couple of consecutive trades turn out to be losses. Trying to make up for those losses, they just keep opening position after position, each larger in size and volume than the previous one. This is primarily done as an attempt to get on track with profit targets. However, the tendency to open the most possible positions in hopes of increasing the chances yields its opposite effect: rational decision-making becomes even more difficult for the traders, hence leading to more losing trades.
Causes of Overtrading
Overtrading occurs when a trader or broker exceeds their strategy’s limits, driven by the urge to trade without following their plan, leading to poor results. To avoid this, you can update the plan with stricter entry and exit criteria. Overtrading is also caused by emotions such as;
- Fear: This is similar to overtrading by individual traders in order to make up for a loss.
- Excitement: This usually occurs when markets are moving really fast, and it might tempt traders into opening positions with no analysis being considered.
- Greed: when the traders are in profit, they want to make bigger and bigger money
Signs That Your Account Manager Might Be Overtrading
- Too Many Trades: If your account manager starts making more trades than he usually does, without any apparent reason, then that could be overtrading. Recall that a good strategy is about the quality of the trades, not the quantity.
- Rising Costs: Overtrading generates more transaction fees that may shrink your net profit. If costs are going up while your profit isn’t, perhaps that’s because of too much trading.
- Minor Wins or Losses: When you note too many insignificant wins or losses and the account balance does not appear to be getting any better, that’s a sign of meaningless, excessive trading.
- More Losses-Drawdowns: In case there are more frequent or greater losses from an account, then that is a likely indicator that its manager is overtrading on it and not following any sound plan.
Why Overtrading Leads to Poor Results and Losses
Overtrading often leads to losses because your account is exposed to many risks that are not necessary. Each trade has costs involved, such as fees and spreads, and when these are too many, they add up real quick. Overtrading invites emotional decisions as well, meaning poor judgment. Long-term, it will drain your account and make steady growth that much more difficult.
How to Prevent Overtrading with a Managed Forex Account
Draw up a trading plan
The most basic thing you can do to prevent overtrading is devising a trading plan. Without a trading plan, it is difficult to keep yourself in check. It should include entry and exit rules, trade limits for a given period, and risk prevention measures. However, don’t replace a trading plan with profit targets, as it can lead to failure.
Develop a concrete risk management
The trader can’t prosper without a proper risk management plan. When managing risk, you formulate rules to limit losses, calculate how much you’re willing to lose, set a reward-to-risk ratio, price targets, and place stop and limit orders.
Selecting of potential trade through trading tool
There are plenty of trading tools and projects, such as moving averages, that actively help traders identify the best trades for their current trading strategy. Using them will help to sift through the opportunities that aren’t in tune with the trading plan and not to lose focus and switch into over-trading mode.
Take some time off
Many traders begin over-trading to compensate for unprofitable trades, which only perpetuates a losing streak. Therefore, if you feel overwhelmed by emotions and unable to think clearly, it’s better to take a break from trading. Success in trading comes hand in hand with cycles; after some time, you will definitely get back on track. Stopping at the right moment may save you a lot of energy and money.
Don’t try to control the market
Many traders are assured of the illusion that they are able to raise control over the market. However, absolutely all this is just a myth. Sometimes it’s possible to predict where the market will move, but in the majority of cases, its movement is completely impossible to foresee. It doesn’t matter how many trades you open because this in no way raises the chances of profit. The sooner you’ll accept this simple truth, the easier it will be to avoid overtrading.
Characteristics of Responsible Forex Account Management
Consistent Volume of Trades
A responsible manager will maintain a similar number of trades, relevant to the given market conditions and his strategy, and will not be driven by greed to always increase trades.
Adherence to Strategy
The manager will adhere to the accepted trading strategy, working on thoughtful trades that fit your risk tolerance and goals and will avoid impulsive or off-plan decisions.
Risk Management Practices
One finds strict adherence to the rules of risk management through the adoption of stop-loss orders, the use of appropriate position sizing, and the maintenance of low drawdowns, helping to control risks.
Regular and Transparent Reporting
You will enjoy transparency and clarity in timely reports about the performance of your account, trade history, or any change in strategy for your account manager to earn your trust.
Attention to Quality Trades
He will not be enticed into the smallest movement of the market but will diligently make the right choice in the trades that provide him with maximum probability for his success, assuring quality over quantity.
Low Drawdown Levels
A responsible manager will keep drawdowns lower: a percentage decline from peak balance to the lowest. This is a proof that he protects your capital and doesn’t implement high-risk moves.
Long-term Performance Focus
Management is long-oriented in returns, rather than high, quick, possibly riskier returns. The manager focuses on the long-term health of your account over immediate successes.
How Managed Forex Account Help Avoid Overtrading
Professional Expertise
A managed forex account is actively maintained and operated by professional traders who adopt disciplined strategic approaches. These experts are trained to identify high-quality trading opportunities and avoid impulsive actions that could lead to overtrading.
Predefined Trading Strategy
Most managed accounts follow a trading plan defined by market analysis or risk tolerance. This would, in turn, keep the spotlight on the long-term goals and save from excessive trading.
Risk Management
Professional account managers exercise stringent risk management practices by using stop-loss orders, position sizing, and limitation on maximum trades. These features would be beneficial in controlling risk exposure to prevent overtrading, which often leads to a loss.
Use of Automated Systems
Most managed accounts are based on automated trading systems whereby a trade is fired if certain rules are met. The automation takes out the emotional factor since the manager cannot over-trade or impulsively trade during periods of market turbulence.
Constant Monitoring and Realignment
Account managers continuously assess performance to adjust strategies based on market conditions, preventing overtrading by stepping back when the market isn’t favorable.
Transparency of Communications with a Client
In a managed forex account, there is frequent communication between the manager and the client. This ensures that all parties discuss and agree on any changes in strategy or trade volume, helping to avoid overtrading without the client’s prior knowledge.
Frequently Asked Questions (FAQs)
What is the risk of overtrading in a managed forex account?
- Overtrading could increase transaction costs due to the higher fees and wider spreads that cut into overall profits. It exposes your account to more market noise, increases the occurrence of poor decisions, and unnecessary risks. Overtrading may eventually set in emotional judgment and burnout for the account manager, leading to greater losses and diminished long-term performance.
How often should a managed account trade?
- It depends on the strategy followed. Some will be fewer, high-quality trades, while some require more frequent activity. However, a managed account should prioritize quality over quantity, trading only when there is a high probability of success rather than trying to profit from every small market movement.
Is there a limit to how much my account can be traded?
- Yes, you will be able to set predefined limits with your account manager on the number of trades per day, week, or month. You may also set the limits on risk per trade or maximum drawdown. Setting these boundaries ensures that your manager stays within your desired trading frequency and risk tolerance, reducing the risk of overtrading.
