What Is Overtrading & How To Avoid It?

What is Overtrading & What Causes It? 

Forex trading can be very profitable if you identify the right market movement at the right time. Successful traders do capture the right movements, but they don’t sit all day watching the charts for that right time. They come into the market, analyse the chart, check the price action and decide whether or not to take the trade. If they take a profitable trade, they close the terminal, to sum up the day. However, there are some traders who, after taking a profitable trade, start looking for other trades in the hope of making more profits. 

Sometimes, this greed works but on other occasions, this lead to losses. Every trader should come up with a plan as to how many trades he/she would take in a day and how much profit he/she intends to make per trade and in the entire trading day. This will help prevent overtrading, which is one of the main reasons many traders lose in this market. Today, we will discuss overtrading in detail and the factors that cause it, so pay close attention to what follows next.

Here are some reasons why traders overtrade:

  1. Many traders believe that they should be actively investing money and making trades to be successful. However, there are market circumstances in which your trading strategy may not generate any trade opportunities, but that does not mean that strategy is no longer viable. To trade successfully, you should understand when market conditions are unfavourable, and it is more advantageous to remain on the sidelines with cash. In such moments, you need to be really cautious and wait for the right opportunities.
  2. Another common reason for overtrading is the fear of missing out (FOMO). It’s natural to feel the urge to join a market movement when it occurs; however, it’s important to recognise that acting on FOMO can lead to impulsive and irrational decisions that may not align with your overall trading strategy. It’s crucial to stay disciplined and stick to your plan, focusing on the long-term goals and objectives rather than getting caught up in short-term market fluctuations driven by FOMO.
  3. Boredom can also be a powerful trigger that tempts traders to enter trades even when the conditions are not ideal. The desire for action and excitement can overshadow the importance of patience and discipline in trading. However, making impulsive trades out of boredom can lead to poor decision-making and ultimately result in overtrading. 

Classic Symptoms & Types of Overtrading

Some common ways of overtrading are:

  1. Traders tend to run after the market moves because they don’t want to miss out on opportunities. When there’s a significant price movement, it’s natural to feel the urge to enter the market, but if this feeling is driven by FOMO and not based on your strategy, it may often lead to big trading losses. You should carefully assess the market conditions and evaluate whether it’s a favourable entry point. Also, when you have captured a decent amount of pip movement, call it a day. You can calculate the pips captured in your selected base currency using a pip calculator to find out the exact profit you made. You should also consider the risk-reward ratio and set a stop loss to manage your risk better. 
  2. Traders find volatile markets to be extremely alluring due to the potential for larger price movements and increased profit opportunities. While some volatility is necessary for generating profits, it’s important to remember that not all volatile markets are automatically more profitable. Success in trading depends on skill and strategy rather than solely relying on market volatility. 
  3. Sometimes traders allocate disproportionately large amounts of capital or risk to individual trades. This behaviour, known as trading with overly large trade sizes, is driven by the desire for higher profits. However, it can be a symptom of greed and often overlooks the potential consequences of significant losses. It is crucial to consider the risk-to-reward ratio carefully and ensure that the trade size aligns with your risk tolerance and overall trading strategy. This is where trading tools like position size calculators come in handy, as they help you determine the right lot size for your trades. 
  4. When traders become impatient or seek more trading activity, they tend to take weak opportunities. In discretionary trading, where decisions are made based on judgement rather than strict rules, it can be tempting to deviate from the trading plan and enter trades that do not fully meet the predefined criteria. However, you should focus only on setups that align with the trading plan’s parameters and offer strong potential for success. 

The Risks of Overtrading

If you have come this far in the article, you must have realised that overtrading is risky, but what are the associated risks?

  1. Low Profitability: When traders engage in excessive trading, they may take trades that have lower chances of reaching their profit targets or offer unfavourable reward-to-risk ratios. By deviating from a well-defined trading strategy and succumbing to the urge to trade excessively, the overall profitability of trades can suffer. Traders should never compromise on the quality of trades for the safe to take on more trades. 
  2. Higher Costs: Engaging in more trades incurs additional costs. Each trade involves paying spreads or commissions, and these expenses can accumulate with a larger number of trades. There is no benefit in paying fees for trades that are not well thought out or don’t align with the trading strategy. As I said above, you should focus on quality over quantity and ensure that each trade has a high probability of success to optimise trading costs and maximise potential profits.
  3. Bigger Trade Sizes Can Increase Risk: Large trade sizes can have devastating consequences for an account. It’s not uncommon to come across stories where a few trades wiped out an entire account due to their excessive size. This is why you should use a profit calculator, as it helps you find out the potential profit and loss, allowing you to decide whether or not you should take a trade. Proper risk management is the key to achieving long-term success in trading. By controlling the amount of capital allocated to each trade and setting appropriate stop-loss levels, traders can protect their accounts from substantial losses. 
  4. More Time Requirement: Overtrading consumes valuable time that could be better utilised elsewhere. Instead of dedicating excessive time to low-value activities like constantly managing trades, focusing on higher-value tasks that contribute to trading success is more productive. By avoiding overtrading, traders can allocate their time effectively to conducting a thorough analysis, refining trading strategies, and improving their skills. 
  5. Cloud Your Judgement to Understand Reasons for Winning Trades: Engaging in excessive trading can hinder your ability to identify the factors that contribute to your success. When you trade too frequently, it becomes difficult to discern which types of trades or markets are yielding positive results. This lack of clarity inhibits your ability to make informed improvements and adjustments to your trading approach. 

The Pareto Principle

The Pareto principle, also known as the 80/20 rule, suggests that a significant portion of outcomes comes from a small number of causes. In trading, this principle applies by stating that most profits stem from a select few trades or market opportunities. While the exact split may not always be 80/20, the underlying concept remains relevant.

When traders overtrade, they deviate from the Pareto principle. Instead of focusing on the trades that generate the majority of profits, overtrading leads to an influx of additional trades that dilute performance. By recognising the principle and avoiding overtrading, you can concentrate on the high-potential trades or strategies that yield the most favourable results, aligning with the 80/20 rule.

How to Avoid or Stop Overtrading

Step 1: Stick to the trading plan: Overtrading occurs when trades are taken impulsively without adhering to a predefined plan. To prevent this, it’s crucial to have a trading plan in place. Your trading plan should outline clear entry and exit rules and risk management strategies. Having well-defined rules and guidelines makes it easier to stay disciplined and avoid unnecessary trades. Stick to your trading plan and let it guide your decision-making process for better trading outcomes.

Step 2: Keep a trading journal: By recording and analysing your trades, you can determine which trades are profitable and which ones are not. It allows you to assess whether you are sticking to your trading plan or deviating from it. The act of journaling can act as a reminder to follow your strategy and avoid taking trades based on impulse or weak setups. When you have to explain your actions in writing, it promotes self-discipline and helps you make more thoughtful trading decisions. 

Step 3: Review your journal: By analysing your trades, you can determine which trades are the most successful and which are not yielding the desired results. Pay attention to specific markets that may not be profitable for you. For day traders, observe if there are certain days of the week or times of the day that are consistently unprofitable.

Step 4: Minimize risk: If you find yourself consistently overtrading due to boredom or anxiety, it’s advisable to decrease your risk exposure or temporarily switch to demo trading. This helps protect your capital until you establish a healthier trading routine.

Step 5: Try new techniques or strategies: While it’s natural to want to explore new markets, strategies, or lower timeframes, it’s wise to test these ideas with smaller risk per trade or on a demo account before implementing them with regular position sizes. This allows you to assess their viability and effectiveness before risking real capital.

The Bottom Line

Overtrading often stems from a well-intentioned desire to increase profits, but it’s important to understand that more trades don’t always lead to greater profitability. In fact, beyond a certain limit, it may result in diminishing returns or even losses. To counter overtrading, start by maintaining a trading plan that outlines when to trade. Keep a journal to track and regularly review it to evaluate the effectiveness of your trading strategy and mitigate potential risks.


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