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TRADING PSYCHOLOGY

Are you a Victim of Overtrading?

How to identify when NOT to trade, using Bollinger Bands

Forex Strategy Are-you-a-Victim-of-Overtrading

Back when I was starting out, I used to find myself searching for a trade, even if my system wasn’t showing me one. It’s called overtrading. I’m sure we have all been guilty of it at some point.

My problem was I couldn’t identify the optimum time to take trades that offered the best potential. I would lose money, time and time again, as the market reversed and stopped me out.

The majority of trading systems are built around momentum, or following a trend. After all, the price has to move for us to make money, and identifying the correct place to be in (or out) of the market is the key to make promising strategies profitable.

Maybe (like me) you even threw away a system that gave good signals, but lost you money when the market is range bound?

This is why sometimes the best trade is no trade. But how do you identify when not to trade?

There are a few well documented methods for spotting periods of momentum and high liquidity. There are indicators and oscillators which show you extremes. You can even use price action or candles.

When the price is pushing these indicators towards their extremes, more often than not the price is trending.

But to truly identify whether you should be in a trade based on your favorite indicator, you need to study it, and understand its personality.

Jumping On Momentum

I discovered, for me to have the best chance of making profit on a trend trade, I needed to act on the momentum as it breaks away from range bound areas (or consolidation areas).

My favorite indicator to identify momentum and range bound areas is Bollinger bands.

Let me show an example of the EUR/USD 15 minute chart (see Chart 1).

Quite often traders use Bollinger bands to show when price could be about to reverse. I use it in the opposite way. I use it to tell me when to trade into the momentum, and when NOT TO TRADE.

It’s not the “holy grail”, you will get false breaks, but it keeps me on the right side of momentum more often than not. If I stick to my signals, my risk strategy, my money management, then everything will be alright.

Forex-Strategy-Are-you-a-Victim-of-Overtrading-eur-usd-15minChart 1: EUR/USD 15 minute chart

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