Are you still losing despite doing everything correctly? Then you might want to check these five deadly Os of trading:
- Overconfidence
- Overtrading
- Overleveraging
- Overexposure
- Overriding Stop Losses
When you're in the forex market, your greed and overexcitement can hinder you and your position from achieving great returns. The emotional pressure they bring will subject your trade to the five deadly Os of trading.
Lesson Highlights
- Traders who let emotions cloud their decision-making increase risk and cause losses.
- Overconfidence includes the bias of overestimation, over-precision, and over-placement of a trader's own performance.
Overconfidence
As a trader in the high-risk world of forex, confidence is an essential trait to have. With confidence, you're more likely to manage your risks and acknowledge profitable opportunities properly.
However, it can be costly once your confidence gets in the way of your rationality. If this happens, your confidence has turned into overconfidence.
Overconfidence bias will risk your position because of your excessive and irrational risk-taking. These poor judgments will most likely result in losing a big chunk of your investment.
Here are the three Os of overconfidence. Let's see if you fit one of these Os:
- Overestimation of your performance.
- Over-precision of knowing the truth.
- Over-placement of your performance over another.
To avoid these cognitive biases, you must take time to know yourself and your trading skills. Ensure you understand where you are in terms of trading capabilities.
Remember that you're bound to be wrong at some point. It's always practical to assess your strategies before you make any trading decisions.
Overtrading
If you trade with greed and excitement, you're bound to make the deadly mistake of overtrading.
Overtrading is when you trade too frequently without sound and proper strategies. That includes taking huge trades and uncalculated risks.
Remember, overtrading comes from your impatient tendencies. This destructive tendency would do you more harm than good.
If you overtrade, your account will suffer from high fees and losses. Why? Because the more positions you have, the bigger your account spreads.
And since traders who overtrade tend to neglect sound strategies, their position is more likely to lose.
You need to be a patient trader to avoid overtrading. It may sound cliche, but being successful will bring you to great heights.
Overleveraging
One of the most eye-catching features of online trading is the ability to leverage your trade. With margin trading, you can enter a bigger position with only small capital.
Suppose you're trading on margin with leverage of 50:1 for a notional value of USD 120,00. With margin trading, you can control the USD 120,000 position with only USD 2,400.
Sounds enticing, right?
Well, it's not all rainbows and butterflies. Leveraging your trade also puts your position at significant risk.
Leveraging is risky as it is, but what more when you overleverage?
When you overleverage your position, a small market swing can damage your entire equity.
To avoid this, make sure your leverage complements your risk tolerance. If you have a healthy margin level (above 500%), you can take up to 100:1 leverage.
But if your margin level is at 150%, trading with low leverage gives your position room for a breather because the market swings complement your trade.
Overexposure
Overexposing your trades happens when you overcommit and overinvest in a single position or market. If you do this, you put a big chunk of your capital in a single risk.
If this happens, a small market swing will wipe out your investment if it goes against your position.
To avoid this, you should diversify your trade while considering the currency pair correlation.
Remember, one risk of overexposure is when you target a single market. However, trading on two currency pairs with a positive correlation will yield the same result: overexposure.
When you trade two positively correlated assets, it's like you're trading a single market because the market tends to move in the same direction.
So, it's best to trade two pairs that are negatively correlated. This way, the two pairs move in a different direction. When one pair is losing, the other is winning.
Overriding Stop-Losses
Your stop-loss orders are your best buddy when you don't want to subject your position to the volatile nature of the market.
Stop-loss orders automatically exit your trade once the market reaches your set stop-loss level. It is your predetermined strategy before you even enter the trade.
However, many traders can't stick to their predetermined plans. They override their stop-loss order to be in the market longer.
Remember, to be a good trader, you must always stick to your plan and know that when your position passes through your plan, it’s no longer valid.
Never let greed and excitement get to you.
Okay, so you now know the five deadly Os when you're trading forex. You can fight them with discipline and mental toughness. In the next lesson, you'll learn the best tips when you're new to forex trading.
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