What Is Overtrading And How To Avoid It

Cobra Trading, Inc.
Apr 25, 2022

Overtrading is placing too many trades. However, the definition of “too many” is up to each individual trader, there is no arbitrary number. The answer all depends on your trading style, specialization, knowledge, and experience. 

For some traders, placing 50 trades a day is manageable. For others, this number is way over the top. Some traders only need one or two trades per day because they are extremely selective.

Given this ambiguity, how do you know if you have overtraded? Here are three things to consider if you want to find out what your personal trading limit should be.

Determine your average number of trades and compare the numbers

How many trades per day do you usually place? Think of those days when you felt comfortable and confident about your trading. In addition, a trading journal can help you. It is a great tool to collect data about your trades and the market behavior, as well as your habits and tendencies. Use this information as a benchmark to compare your daily stats.

Keep this data regularly updated because it’s not unusual for habits and rules to change over time. The market shifts, and great traders pivot their trading strategies along with it. However, the adaptation process tends to be gradual, so sharp spikes in any direction can be seen as a warning sign.

Was the market busy?

Market behavior often affects the way people trade. If the market was slow, you might have been tempted to force some trades. For example, no setups matched all of your criteria that day, yet you entered a few trades regardless. People get bored when not much is going on, and this is how even disciplined traders fall into the trap of overtrading on slow days. 

And if the market was extremely busy, you might have felt overwhelmed and sidetracked by all the activity. Many traders who are afraid of overlooking great opportunities tend to jump into subpar trades because they don’t want to miss any potential gains. This action is exactly what leads to emotion-driven trading and poor choices. Besides, it’s easy to ignore a perfect setup on accident when you’re chasing too many things at once.

That’s why it’s prudent to be extra cautious on days when the market is way busier or quieter than usual. On days like this, you need to intentionally slow down and let the trades come to you.

Consistently profitable traders know their niche and follow their plans. They don’t seek out trades or bend their rules to fit an extra trade into their day. Instead, they cherry-pick the setups that are most likely to profit them, and leave gambling behind. Fear of missing out, otherwise known as FOMO, is a severe issue for many day traders. If you want to avoid it, write down your rules and keep that information where you can see it when browsing the market. This way, you will know at a glance if the trade fits your criteria.

Were you losing control of your emotions?

Emotional trading is a bane of many day traders. Being disciplined and strict with your rules is much harder than it sounds, and it takes practice to get better at it.

But while you are in the process of gaining experience, it’s way too easy to let things get out of control. One of the worst side effects of overtrading is revenge trading, which is placing trades to recoup previous losses. That’s how each new transaction gets charged with even more emotion, and the decision-making process devolves into chaos.

Occasionally, a few bad trades can snowball into a terrible day, week, and even month. At that point, there are several steps you can take to stop yourself from destroying your account even further. This is what helps traders stop overtrading and get back on track:

  • Recognize the pattern and admit that it is a problem
  • Review your trading criteria and have well-defined rules to keep yourself in check
  • Let the trades come to you.

If you know that you are prone to emotional overtrading, establish a point where you are forced away from the screen. Have a solid risk management strategy in place and consider creating a hard daily limit for yourself, be it a total number of red trades or the amount of money lost.

And if you are experiencing FOMO, remember that cash is a position of its own. You’re not skipping trades, you are choosing a cash position over needless risk and potential losses.

The overtrading mentality has a high opportunity cost. It can make you steamroll over your progress and set you back both mentally and financially. This is why we encourage day traders to have clear rules for themselves. At Cobra Trading, we are determined to help people learn more about all aspects of trading and provide educational  resources that will benefit both beginner and seasoned traders.

And if you’d like to open an account with us, our customer service team will be happy to assist you! Simply reach out via a live chat with any questions, and start your application process today.

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