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How to Avoid Overtrading

Overtrading is one of the top 10 trading mistakes that traders make. It is bad because it makes traders lose money. Everyone trades differently and uses different patterns, so the frequency of trading is different for every trader.

If you are a day trader and you normally trade 3 times a day, overtrading could mean you started trading 6 times a day. For swing traders who usually trade only 5 times a week, then 10 trades a week may consider overtrading.


Why is Overtrading Bad?

Overtrading by itself is not necessarily bad if you are only trading the patterns that were proven to work for you. Making more trades may be more profitable. However, most people have the tendency to overtrade for the wrong reasons and they often result in big losses. Here are three situations where traders started overtrading.

  • Losing Strike - When a trader is on a losing strike, many traders want to make back the money that they lost as quickly as possible. In other words, they want to get revenge from the market.

    Unfortunately, this type of thinking usually makes a trader lose even more money as he is trading on emotion rather than logic. To trade successfully, a trader needs to think clearly and have a plan at all times. When you are on a losing strike, the best thing to do is to take a few days to a few weeks off from the market.

  • Winning Strike - On the opposite side, there are traders who started overtrading when they are on a winning strike. Some traders get overconfidence in themselves and start trading non-optimal patterns. They don't wait for the perfect setup anymore, and they just get on trades early trading to anticipate a pattern rather than let the market tell them what to do.

    When you get on trade early, you are basically trading with a new pattern rather than the one that was proven to work for you. When you take on these trades and lose some money, you may get angry at yourself and start revenge trading. That's when you compound the mistake by trade even more. And the cycle repeats itself.

  • Winning Pattern Doesn't Occur Often Enough - The third situation that leads to overtrading is when the market condition is not right, and your winning setup just doesn't occur as frequently as it used to. Instead of waiting longer, you started to take on random trades. Remember, a profitable pattern is your edge in the stock market. Without that edge, you shouldn't be trading at all.

    Making random trades is dangerous because you lose the edge that you used to have. Maybe the market condition has changed, and it is time for you to start finding a new pattern. The pattern you have might work better during a bull market than a flat or bear market. Instead of keeping trading and betting your money on random patterns, it's much better to stay out of the market. You can use this time to study the market, improve your trading strategy, or try to find a new profitable pattern. Your old pattern might come back in the future.

Consequences of Overtrading

There are many negative consequences for overtrading.

  • Get Stop Out Often - When you trade with the patterns you have no confidence in, you will shake out from trades more often than you used to.

  • Money is Tied up - When your money is tied up to trades with patterns that aren't proven for you, you can't trade when the stocks with your profitable pattern come up. By the time you get out from the other trade, it may already be too late to buy the stock with your winning pattern. The stock could have already moved up and it is no longer optimal to get on the trade.

    In this case, overtrading causes a loss of opportunity and prevents you from trading your pattern. That's one of the reasons to have some cash in your account rather than be fully invested at all times.

  • Lose Confidence - Overtrading and losing money will cause a loss of confidence. You may lose confidence in yourself for not following your rules and get frustrated. Frustration often causes bad decisions and you will end up with even more losses.

Do not overtrade. Trade only with the patterns that have worked for you. If you don't have that type of pattern yet, it is time to stop what you are doing and start looking for a winning pattern. How to Find a Profitable Pattern Complete Guide to Penny Stocks Trading

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