Ever heard of the line, “Try and try until you succeed”? I’m gonna let you in on a little secret. Sometimes it doesn’t apply to trading.
One common mistake that newbie traders make is overtrading. Because of their fear of missing opportunities to make money, they throw themselves at every little setup they see. Don’t get me wrong, I believe that you also have to be a risk-taker in order to be a successful trader. However, there’s a big difference between making well thought-out trade decisions and proper risk management versus reactively risking your money blindly at every little setup that comes your way.
This shotgun approach not only damages your account but it also takes a toll on your psychological well-being. A typical scenario may go something like this: After losing a trade, you see a new setup and you decide to take it, thinking that it will be a winner and it will offset your loss. Sha-bam! The market reverses and the trade turns out to be a loser. Now you just bruised your ego and your account even more!
What can you do to keep yourself from overtrading?
Instead of spreading yourself out too thinly, why don’t you try specializing first? This is what niche trading is all about.
Royce Gracie, dubbed one of the best mixed martial artists of all time, used his mastery of jiu-jitsu to defeat fighters of mixed disciplines. It’s all about finding out what you’re good at, what your niche is.
To define your niche in trading, there are four questions you must ask yourself. These questions will help ensure that your specialty fits your personality to a T.
Which currency pairs will I trade? Each pair has its own behavioral tendencies and it’s important that you match your personality with the behaviors of the pairs you plan to trade. For instance, if you enjoy trading with risk sentiment and if you like volatility, then maybe you’ll do well trading crosses like EUR/JPY and GBP/JPY.
What time frame will I use? How much time can you devote to trading? Which trading session are you able to be in front of the charts? Do you thrive in fast-paced environments? Are you capable of making decision on the fly or do you need a lot of time and preparation before you commit to a trade? These are questions that must be answered for you to determine your ideal time frame and define your specialty.
How will I make decisions? There are successful traders who–from many years of experience–make decisions based solely on intuition and gut. So, unless you’ve done and seen it all, making snap trading decisions may not end well for your account. You need to develop a framework that makes sense to you to help you understand and internalize market behavior. And with this framework (whether it be chart patterns, moving averages, or trendlines), you can then make better trading decisions.
What’s my strategy? This basically addresses the manner in which you will be trading your market framework once you have figured out which behavioral tendencies make the most sense to you. For example, if you’re good at recognizing consolidation patterns, then you’ll have to figure out whether playing breakout setups or range reversals would be most comfortable for you. Some of you may be more comfortable trading ranging markets while others prefer riding trends. There are even traders that prefer working with numbers and statistics rather than charts and candlestick patterns.
Keep in mind that the goal isn’t to close doors and limit ourselves when undertaking niche trading. On the contrary, we do it to grow as traders. It helps us overcome the pitfalls of overtrading and sets the stage for expanding our horizons down the line. So you see, the sky’s the limit once you’ve defined your niche – your very own corner of the sky!