Danger of Overtrading – Reasons and Solutions

Overtrading is a familiar issue to all forex traders and is considered the most common pitfall. The compulsive, unanalyzed decisions to enter a trade and the disregard for the trading strategy often turn into an unpleasant and costly experience, therefore most forex traders try to select the very best trades and avoid overtrading at all cost.  

What is overtrading? 

Overtrading happens when your business doesn’t have the resources – stock, staff, supplies – to fulfil orders before being paid. Even profitable businesses can struggle with overtrading if you don’t manage working capital effectively and you’re not prepared for the level of growth you’re experiencing. Whether you’ve just launched a start up or are an established business looking to expand, overtrading can happen to any business.   

Danger of Overtrading – Reasons and Solutions

The most important thing is to distinguish between mindless overtrading and trading a lot but according to the strategy plan. There is nothing wrong with trading non-stop if it is a part of your successful system.  Overtrading, on the other hand, is triggered by greed, anger or revenge which is doomed in the long run. 

Many forex traders feel the need to make the money back after an unfortunate loss. The revenge instincts paralyze the logical sense, you completely ignore the money management strategy and you continue trading not because it is in your trading plan, but because you are too angry to stop. Revenge trading is definitely bad and only leads to a string of more losses. And if you are not careful, overtrading can set your entire forex account to flames. 

Overtrading is when your strategy plan says “ I make 50 trades per day” and you end up making 200! Generally it wouldn’t even be so disastrous if all 200 trades meet the criteria planned out for 50 trades. However, naturally overtrading is accompanied with series of other issues such as: 

  1. You are desperately trying to find a signal you can actually read to rationalize the unplanned trade. Sometimes you just need to let go and sit still because there are no good trades! Without fully accepting this you will end up emptying your forex account in no time.
  2. Staring at charts makes you feel the urge to trade. This is similar to a gambling addict who cannot stop from gambling the moment he sees a casino. Just because you have opened the trading platform and are looking at charts doesn’t necessary mean that you have to trade right here right now! 
  3. You are frustrated when forex trading platform is unavailable (for example, when you are in the shower, or went out shopping or taking your dog out for a walk). And you get super pissed when you see missed trades – the trades you could have made if only you were next to the computer at that moment. You secretly wish to stay awake for 24/7! 
  4. You make excuses not to follow your trading plan. You convince yourself that you will miss out on huge profits, that you are not risking very much, that you are enhancing your trading strategy with new moves, that your system isn’t perfect yet and, besides, you will only do this kind of trading once (yeah, right! Until next time overtrading takes over!) 
  5. You start thinking that the more you trade the more money you will make. Disoriented by profits, you might consider moving to 1-minute charts instead of 5-minute charts. After all, if you make tones of money with the current chart settings, imagine all the millions you make with 1-minute charts! In reality, greed is your worst enemy. 

Prepare a trading plan

The most basic thing you can do to avoid overtrading is devising a trading plan. Without a trading plan, it is impossible to keep yourself in check. It should include some entry and exit rules, the maximum number of trades you can take within a given period, and risk prevention measures. But don’t use profit targets instead of a trading plan, or you’ll be setting yourself up for failure.

Develop a good risk management strategy

No trader can succeed without a proper risk management plan. Risk management includes rules and guidelines that you create to minimize your losses from unsuccessful trades. This can be done by calculating the amount of money you’re comfortable to lose and your risk-reward ratio, setting price targets for your trades, and placing stop and limit orders.

Use trading tools to sort through potential trades

There are many trading tools and programs (for example, moving averages) that can identify the best trades for your current trading strategy. Using them can help you weed out opportunities that aren’t in line with your trading plan and prevent you from losing focus and switching into the overtrading mode.

Take some time off

Many traders start overtrading to compensate for their unsuccessful trades, which only prolongs their losing streak. So if you feel like you’re getting overcome with emotions and can’t think straight, it is better to take a break from trading. In trading, success is cyclical, and after some time you’re bound to get back on track. Stopping at the right time can save you a lot of energy and money.

Don’t try to control the market

A lot of traders mistakenly think that they can control the movement of the market. But this is simply not true. Sometimes, the movement of the market can be predicted, but in most cases it is completely unpredictable. No matter how many trades you open, it doesn’t improve your chances of getting profit. The sooner you accept this simple truth, the easier it will be to avoid overtrading.

Overtrading is a forex devil – he grabs you, twist you around, sends you flying up in the air and plunging back down. You HAVE to chase the forex market. You CAN’T miss out now! Let’s go long! No, let’s go short! You want your losses back! You want it now and quick. And ooopps, all of your money is gone… 

We all know that practice makes perfect, however in forex trading overtrading leads to losses. It is important to understand the existence of overtrading, to find out the reasons why it happens, to recognize the signs and to prevent it from happening. There is no one solution for every trader, so therefore each forex trader has to determine the overtrading reasons according to one’s trading style.  Keeping a journal of your trades can help figuring out if you are trading more than your forex plan calls for.

How to stop overtrading? — Key takeaways

Overtrading is an issue that both experienced and beginner traders can face. It refers to the excessive buying and selling of tradable assets, be it Forex pairs, stocks, commodities, etc.

According to the definitions for overtrading, this is a purely psychological issue that is associated with the poor emotional state of a trader. It usually occurs when a trader is overtaken by the greed of getting more payouts or anger of losing money. Either way, the result is uncontrolled trading that ultimately leads to losses.

But fortunately, there are some techniques that help traders overcome their emotions and lead better trades. In the article, we talked about 5 of these techniques:

  1. Setting up a trading plan
  2. Refraining from all-day-long trading
  3. Limiting the number of trades per day
  4. Taking a break after a loss
  5. Setting stop loss and take profit limits

While these techniques are definitely not everything traders can do to avoid overtrading, they’re still pretty effective in achieving that end-point: not trading excessively.

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