The Trading Guide Part 3-Limiting The Number Of Open Trades

If you are new to trading there are a few simple rules you can follow that will greatly increase the likelihood of surviving and succeeding.

Our first rule was around daily loss limits. Our second rule was around losing streaks.

Our third rule is that you should limit the number of open trades to 3.

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3 may seem like a very small number, but it’s what we recommend at the beginning in order to truly focus.


Having too many positions open can lead to bad trading for a number of reasons, both logical and psychological.

 

One problems is that you may find your account is over-exposed if all the products are tightly correlated with each other.

 

Let’s say, for example, you short Gold; later you short the Euro and later the Swiss franc. So you find you have short positions open on EURUSD and XAUUSD and a long position on USDCHF.

What you have, in fact, done is to open a large long position on the US Dollar that is likely three times the risk that you would normally put into any individual trade.

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If the USD drops unexpectedly and all your open positions move against you at the same time, you can incur losses more quickly than you planned.

As we’ve spoken about before here, once you start losing it is then very easy to continue on a losing streak and then completely blow up your account

 

For successful trading, you need to accurately assess your risk and choose a strategy that minimises it.

Contrasting this, when you have too many option positions you can have contrary positions running simultaneously.

 

For example, you may find ourselves in long positions on both USDCAD and Oil.

 

These are actually contrary positions as any movement in the price of oil will inversely affect USDCAD. If you win on one product, you will always lose on the other, making a positive P&L even more difficult to achieve.

Another problem is when you open more positions as a response to a lack of volatility in the market,  as you try to compensate for the fact that price has not reached our profit target.

We often do this due to boredom, and that can be a dangerous mental state to trade in as we’re more likely to make impulsive trading decisions.

 This bored trading can negatively impact our P&L. For example, sudden volatility, like a major economic news event, can leave you overexposed in one currency.

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Whatever the reason you have multiple positions, it is important to understand your risk, and manage that risk. Until you know how you perform in different situations, we recommend setting your number of open trades to 3.

So, to recap:  

 

·      Managing a small number of trades allows us to focus.

·      Avoid opening correlated or contrary positions.

·      Avoid “bored” trading in low volatility situations.

Marise Gaughan