Welcome Traders and Readers, This will be my first article here on Dukascopy and I hope the information will benefit you in the future.
As we are a community you can feel free to ask me any question, I will do my best to answer them all quickly. This also means that if there are multiple members who would like me to talk about some specific subject in a new article, please let me know.
In this article I will talk about multiple ways that will help you prevent overtrading, entering trades at exactly the wrong time and the use of different chart perspectives.
Overtrading When I just started trading I found myself entering a lot of trades because I liked the price action and I thought my position would benefit me. Sadly all my losing trades showed me I didn’t had a clue about price action after all, this resulted in many loss trades or profitable trades which I closed way too quickly.
I think most of you who have actively been trading can relate to this.
To stop myself from opening trade after trade without being well informed and having any clue I started paying attention to the following:
* Ask yourself before you quickly open a trade why you are doing it. Is it because you feel the price will move down or up or is it because there is some valid reason? Just because you think the price will move up or down doesn't mean it will. After all, we are small traders and no big financial institutions who in effect can move markets in their own because the gigantic orders they place.
* Are you opening the trade simply because an indicator shows the price should move up or down? Often these indicators give you the wrong information. Most indicators are lagging and not leading, this means they are based on old price movements.
* Have you been looking a different timeframes? I mean, the 1 minute chart might look like a great short opportunity but is it really? Maybe the 1 or 4 Hour chart shows you the price has just found very strong support. This would probably result in your short position to be closed for a loss very soon.
* And to end this topic for now, never ever take a trade because you think of feel like you have to. All professional traders master one very important habit, and that is having patience. The market consistently moves and the future is full of new opportunities so please don’t open a position because you feel you have to.
Entering the trade at the wrong time because of an indicatorWhen I just started trading I often opened a trade based on indicators such as the RSI( Relative Strength Index). In theory the indicator shows you to buy when the RSI indicates a number below 30 and shows you when to sell when the number is above 70.
In this image I show you why you shouldn't trade just because an indicator tells you to do so. In the image I have described why so many people keep entering the wrong trades.
You can also see that the RSI keeps indicating oversold conditions but none of them would have given any good trades.
Please note that that a lot of other indicators also give you signals which will get you in the wrong trades. Also make sure not to use many different indicators at once, a normal person isn’t capable to watch ten things at once successfully.
Instead I’ve found it really helpful to only use one or two indicators and focus more on the price action on different time frames to help me get in the best possible trades.
Perspective From a macro perspective I always make sure I have the H4, Daily, Weekly and Monthly charts on separate screens. This prevents me from taking the wrong side of the trade. For instance, EUR/USD has been very bullish the last few days (means prices go up).
On a small 1 or 5 minute time frame I wouldn’t have had any clue that it was intensely bullish. This could have resulted in me taking a lot of sell/short positions on EUR/USD. In the 5 minute chart below I will highlight some places which I could have used to go short with a red arrow. The points of interest are also numbered with 2 and 3. Please click on the image for full size.
If I had opened 2 short positions on the highlighted points there is a possibility I could have made some small profit.
However… I would have missed the less risky and more profitable move up.
If I would have only been focussing on the 5 minute chart I would have missed the big and less risky EUR/USD upwards move from the green box. Therefore I always use multiple timeframes, in the image below I show why you also should use bigger ( H4, Daily, Weekly) timeframes.
And secondly the same lines on the daily chart. This will help you understand why I drew the different boxes and levels.
If you are reading this, well done. This means you for studying hard. If you keep all the tips I gave you in mind it will definitely save you lots of time and money.
