What are the signs of overtrading?
Overtrading on financial markets, be it Forex, stocks, metals, etc. refers to a process of buying and selling securities excessively. It is an issue that both beginners and experienced traders can have. It occurs when people don’t stop trading and, eventually, lead themselves to financial problems.
Furthermore, it is important to note that the causes of overtrading are associated with trading psychology
and the way traders handle their emotions during the process. It occurs when traders haven’t completely (or at all) realized their expectations from trading. Instead, they execute trades without a systematic trading plan. In short, it is their emotions and greed that leads traders to overtrade on the market.
Now, because it is a psychological issue, there are ways of changing the attitude people have towards trading. Through self-correction and conscious decision-making, traders can give up a malicious habit of overtrading.
Some tips on how to prevent overtrading
In this article, we will talk about 5 ways a trader can improve their emotional responses towards trading and avoid Forex overtrading. These ways are:
- Having a trading plan
- Refraining from trading all-day
- Limiting the number of trades per day
- Taking time-off after a serious loss
- Setting stop loss and take profit limits to your trades
Let’s discuss each of these techniques in detail.
The importance of a trading plan
This first technique is applicable to any trader, whether they have a problem of overtrading or not. Having a trading plan can introduce order and structure to the process of trading and make traders more conscious about their decisions.
Here’s what a trading plan should look like: it should indicate a specific instrument that a person wants to trade; a specific time of the day when they are planning to execute trades; an approximate amount of gains they want to make and losses they’re willing to take.
In short, a trading plan should provide a course of action for the day and keep a trader aware of their realistic expectations. Following these self-made rules is one of many overtrading solutions; it can help traders realize that it is better to know the exact time when to trade instead of buying and selling securities chaotically.
Don’t trade all-day-long
One of the important characteristics of trading Forex is that it hardly looks like an 8-hour job where you have to open new trades and close old ones all the time. In trading, what matters most is seizing the right opportunity, which is not something that one can achieve by trading all-day-long.
But perhaps more importantly, sitting in front of a screen 8+ hours a day can inevitably exhaust a person and impair their ability to make well-thought-out decisions. And in many trader’s experiences, this can be one of the major indicators of overtrading: thinking that you need to trade all-day-long for success when all you really do is trade excessively and ineffectively.
So, instead of that, it is better to choose a small time-frame and place trades when you feel like the opportunity is right. But you don’t need to make guesses: there are lots of technical indicators that can help you make more or less accurate predictions.
Limit the number of trades per day
This next advice is related to the previous one and states that the number of trades doesn’t necessarily translate into significant payouts. Instead, what makes the real difference is the effectiveness of individual trades.
After having a successful trade and generating considerable payout, a trader may be enticed to continue trading and get even more payouts. Something similar is true for losses: a losing trade can easily make someone want to open new positions again and again and balance out previous losses. This can also be one of many examples of overtrading: letting greed and anger get the best of the trader, instead of staying rational and cool-headed at all times.
So, here’s the advice: determine a specific number of trades that you want to open in a single day. Make sure you stick with this schedule and whenever you feel like opening just one more trade, remind yourself that there’s always tomorrow, yet there’s a limit to how effective our brain can function in a day.
When you lose, take a time-off
As noted above, losses can be very hurtful and even blinding. They can make a person angry to the extent that their rational judgment is clouded. After a loss, a trader is automatically thinking about placing a new position and restoring their previous account balance.
Unfortunately, that’s not how it usually happens: blinded by anger and the desire to fix the current situation, some traders tend to overtrade and place too many unsuccessful trades in a day.
So, instead of falling prey to these causes and effects of overtrading, it is typically a better idea to take a time-off and freshen up the mind. By doing that, the anger caused by the recent loss will cool off so that a trader can think more clearly and execute trades more rationally. After losing trades, traders tend to overtrade to cover the losses, and that approach is called revenge trading. Revenge trading is highly dangerous and can blow up trading accounts very fast.
Set stop loss and take profit limits to your trades
Now, even if you ignore the above-mentioned overtrading signs and solutions and can’t help but trade your specific security excessively, there is still a way for you to set a certain limit to your payouts or losses. Beyond that point, you will get a direct signal to stop trading right away.
When setting the take profit limit, it can be a good idea to look at your previous trades and choose the highest payout that you have received. For instance, let’s say your most successful trade during the recent period generated a payout of 1K, you can set the take profit limit to that specific point or somewhere near to it.
The point of the take profit and stop loss
limits is to remind you that by overtrading, you are likely to give away some of your payouts because of poor trading decisions; and that’s in a good case scenario. As for losses, if they occur consistently trade after trade, you may want to limit the number of unsuccessful trades, as well as the amount of losses in individual trades. And a stop loss can be a useful tool for that.
More ideas on how to stop over trading
How do professionals avoid to overtrade forex pairs? What can we learn from them? Professionals are managing a large amount of money, which makes responsibility greater. If you are trading using a 100 USD account, it's very difficult not to overtrade. It's important to have an adequate trading balance before you start trading.
The second idea is to be accountable. Most professional traders have trading journals or sell trading signals that make them more accountable. When you know that you will be saving your trading information on your journal at the end of the day, you will be more selective in your trades.
It's also essential to have saved up fund for drawdown periods. No matter how good your strategy is, every strategy experiences drawdown periods. When you need money to pay your bills, you will overtrade and take bad trades. In addition, it's critical to approach trading as business and not as a tool for gambling.