Overtrading and chasing losses
What you learn in 3 minutesA reader asked: 'I had one bad trade on USD/ZAR and then made thirty more that day. Why did my account drop so much?' This lesson shows how overtrading and chasing losses turn one loss into a week of losses. We use rand figures so you can see the cost in money, not just points.
30 trades on USD/ZAR: where the money goes
| Step | Amount | Note |
|---|---|---|
| Planned trades for the day | 3 | From the reader's own trading plan |
| Actual trades taken | 30 | The reader traded ten times the plan |
| Spread cost per trade (0.10 lots) | R18.41 | USD/ZAR at 18.4100; 0.10 lots means 10,000 units. One pip is 0.0001. 10,000 × 0.0001 = 1 USD per pip. At 18.4100, 1 USD = R18.41. A spread of 1 pip costs R18.41. |
| Total spread cost for 30 trades | R552.30 | 30 × R18.41 = R552.30 |
| Gross trading result before costs | R120.00 | The sum of the 30 trades before any costs, as recorded by the reader |
| Net result after spread | -R432.30 | R120.00 − R552.30 = -R432.30 |
| Share of costs in the gross result | 460% | R552.30 ÷ R120.00 = 4.603, or 460% |
Your broker may charge commission on top of the spread, and the spread itself can widen around news or at market open. Some brokers round the pip value or quote a different spread for the same pair. The figures here are only an example based on the numbers given.
The mistake people make here
The common mistake is to treat a loss as a signal to trade more and larger, hoping one big win will fix the day. That raises both the number of trades and the cost per trade, so the spread and commission grow faster than any likely gain. Instead, set a daily trade limit and a daily loss limit in rand before you start. When either limit is hit, stop for the day. If you feel the urge to win it back, write down the next trade you would take and wait until the next session to review it.Check yourself
If you take 20 trades on USD/ZAR at 0.10 lots and the spread is 1 pip, what is the total spread cost in rand? Use USD/ZAR at 18.4100.
One pip at 0.10 lots is 1 USD. At 18.4100, that is R18.41. 20 trades × R18.41 = R368.20.
Your gross result before costs is R80.00 and you paid R368.20 in spread. What is the net result, and what percentage of the gross result did costs take?
Net result: R80.00 − R368.20 = -R288.20. Costs as a share of gross: R368.20 ÷ R80.00 = 4.6025, or about 460%.
Your plan allows 4 trades a day. You have taken 4 and lost R150. What should you do next according to this lesson?
Stop trading for the day. You have reached your planned trade count. Taking more trades to recover the R150 is chasing losses and will add more spread and commission costs.