Traders who trade with European based FX brokers have had to adopt their trading behaviour significantly, after the ESMA ruling came into force in 2018. The rules and new framework that ESMA introduced were, in their opinion, designed to protect traders. The organisation took time out to analyse the industry and came to the conclusion that certain aspects of traders’ behaviour could not be left to individual, trader discipline. They concluded they’d have to intervene in areas such as: leverage, margin and the protection of trader funds.
Whilst many individual traders raged at the ESMA intervention, with many trading firms labelling it: unfair, undemocratic, heavy handed and authoritarian, after a period of reflection it’s apparent that the new framework has worked. Certain brokers are beginning to report that their clients are, in simple terms, losing less. Now for market makers such as spread betting firms, this change hurts their bottom line; you lose and they win, as you’re betting against their brokerage. But for brokers operating an STP/ECN model, the improvement justifies the ESMA ruling and will lead to strengthening cooperation, between clients and firms. As often stated; those brokers operating STP/ECN models need their clients to trade more successfully, in order to grow as businesses. There is no incentive for honest brokers in the space, not to support the clients in their endeavours.
One key, negative, behavioural habit traders develop, which the ESMA ruling may help in alleviating, is termed “overtrading”. Traders labelled as “over-traders” come in many forms; discretionary overtrading, technical overtrading, bandwagon, hair trigger and shotgun trading, are just some of the descriptions attached to the affliction.
For example, technical overtrading can involve always triggering a market order when the exact parameters you’ve inbuilt into your trading plan are met. Whilst in theory, some analysts wouldn’t heavily criticise this method of trading, traders have to consider building a circuit breaker into their plan. For example, if the method loses five times in series during your day trading session, do you carry on trading, or perhaps consider that today, the market just isn’t working in synergy with your trading technique?
Hair trigger trading is a similar impediment, you may have a loose trading plan, but struggle to conform to it. You might enter the trades perfectly as per your plan, but exit too early, or remain in trades too long, immediately corrupting the trading plan you’ve taken a considerable amount of time to build. This behaviour can become a permanent feature of your trading habits and if it’s not quickly addressed, will be extremely damaging to your confidence and in turn your bottom line profitability.
Traders may now require increased capitalisation, in effect more margin for their positions, to trade effectively under the new ESMA rules, especially in relation to the lower leverage permitted. Traders have to be far more careful with regards to trade selection and far more judicious in relation to their overall money management.
There is an extremely quick remedy to begin addressing the damaging impact of over trading and the process can be adopted by inexperienced and intermediate level traders, who are in the process of creating their trading plans. The process involves committing all you rules to your trading plan and sticking to the plan. However, the remedy for overtrading begins with identifying small improvements first and keeping the changes simple at the outset. It’s a step by step programme and here we’ll make three initial simple, straightforward suggestions.
Firstly; set yourself a circuit breaker. It’s a habit that all institutional traders adopt and indeed some markets we trade in will suspend trading if markets fall by, for example, 8%+ on any given day. If you’re a trader who risks 0.5% account size per trade, then perhaps you should consider applying your own personal circuit breaker of 2.5% loss on any given day, as the maximum loss you’re prepared to suffer. You don’t revenge trade, you don’t take trades outside of the parameter of your trading strategy expecting the market to come back to you. Instead, you accept that on certain days there’s a random distribution of trade set ups that won’t completely fit in with your strategy and that on those days your strategy might not work in synch with the markets.
Secondly; you limit you trading to a certain set time of the day, it could be as London – European markets open, or when liquidity can be at its highest; possibly when New York opens and FX traders across the various time zones in the USA and Americas enter the market, whilst European markets are still open. This instils discipline, there’s little point in trading during conditions when liquidity is extremely low and spreads are high, you could suffer increased slippage, poor fills and the increased spread cost could severely impact on your bottom line.
Thirdly; limit the amount of trades you take on each trading day. You may be a day trader who has a set up that you religiously execute. However, you may have deduced that the set up only occurs, on the single major currency pair you trade, on average twice a day. Therefore, if you trade it more than this average, are you unknowingly violating your trading strategy? There are highly proficient traders who only trade one security, once a day. And indirectly many traders, who found themselves locked into a damaging cycle of overtrading, have found taking an absolute minimum amount of trades, to be a cathartic remedy for overtrading.
For example; they may decide at a certain point early in the London session to go long or short EUR/USD, based on the technical analysis they’ve conducted. That’s it, it’s a fire and forget strategy. The single trade for the day is entered, the stop and take profit limit orders are in place, the market will now deliver a result, but the trader will not intervene.
Recognising that you’re overtrading can be easy to spot, these simple suggestions as potential remedies, are straightforward to implement. As you move ahead and gain experience, you could also consider inputting parameters into MetaTrader to execute the trade automatically. This will also address one of the key reasons you’re overtrading; a lack of emotional control. Gaining control of your emotions and thereby direct control of your trading, is absolutely essential to your future prosperity and can help to rid yourself of the overtrading curse.