What is Overtrading & What Causes It?

N

nikokalo75

To make money in the markets, I must enter trades. If I don’t trade, I make zero dollars. So, I need a critical mass or a minimum number of trades to profit enough for my efforts to be worthwhile.

Let’s use food as an analogy: I need food to stay alive. However, if I overeat or eat the wrong types of food, I will degrade my health and even shorten my lifespan. Yet I can’t cut out food altogether because I need it to function.

Overtrading is similar. I must trade to make money in the markets, but I can reach a level where the behavior becomes unhealthy.

Ultimately, overtrading is caused by not having the discipline to follow a successful trading plan. There are several triggers, and while this is not an exhaustive list, here are some leading causes of overtrading I’ve observed:

1. Assuming money should always be in the market. There will be quiet periods when a strategy does not produce any trades. It’s easy to feel that this is automatically bad because not being in the market means not making money. However, a critical part of trading is knowing when the conditions aren’t right and that it’s more profitable to stay on the sidelines in cash.
Ultimately, overtrading is caused by not having the discipline to follow a successful trading plan. There are several triggers, and while this is not an exhaustive list, here are some leading causes of overtrading I’ve observed:
2. Fear of Missing Out (FOMO). FOMO is a classic psychological issue in all areas of life, and I’d be surprised if there’s a human being on this planet that’s never experienced FOMO. So, it’s not surprising that traders feel FOMO in the markets. When the markets move, it’s tempting to want to be a part of the move, even if it means jumping impulsively in a way that does not fit the trading plan.
3. Boredom. Sometimes, people just crave action. The boredom of waiting for a trade to line up is a real trigger to enter trades without the right conditions and eventually overtrading.
 
s trader said:
I watched and watched the market the whole day and then finally got a signal. Got in and got screwed $300 in 5 minutes. Care to explain that?
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It doesn't show evidence of overtrading or undertrading.
 
Over trading happens when you are predicting the market. You slip into the delusion of predicting the next trade should be put on*. You can make a Sh!t ton of predictions in a day.

A plan will have the exact right amount, by definition. React to the plan signals and put on a trade. Don't predict the signals! Otherwise, you will have trades outside the plan, and possibly many more than the plan.

:)
 
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I watched and watched the market the whole day and then finally got a signal. Got in and got screwed $300 in 5 minutes. Care to explain that?
More...

You're watching for a signal, is it justified from previous results?

1 trade does not make for a strategy.
 
I am trying to say the OP forgot to mention undertrading is just as bad.
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I'll have to politely disagree. There have been many times I
patiently waited for a setup, was a successful trade,
and was 1 and done for the day.

In the past I would have continued trading and lost my winnings.
 
nikokalo75 said:
To make money in the markets, I must enter trades. If I don’t trade, I make zero dollars. So, I need a critical mass or a minimum number of trades to profit enough for my efforts to be worthwhile.

Let’s use food as an analogy: I need food to stay alive. However, if I overeat or eat the wrong types of food, I will degrade my health and even shorten my lifespan. Yet I can’t cut out food altogether because I need it to function.

Overtrading is similar. I must trade to make money in the markets, but I can reach a level where the behavior becomes unhealthy.

Ultimately, overtrading is caused by not having the discipline to follow a successful trading plan. There are several triggers, and while this is not an exhaustive list, here are some leading causes of overtrading I’ve observed:

1. Assuming money should always be in the market. There will be quiet periods when a strategy does not produce any trades. It’s easy to feel that this is automatically bad because not being in the market means not making money. However, a critical part of trading is knowing when the conditions aren’t right and that it’s more profitable to stay on the sidelines in cash.
Ultimately, overtrading is caused by not having the discipline to follow a successful trading plan. There are several triggers, and while this is not an exhaustive list, here are some leading causes of overtrading I’ve observed:
2. Fear of Missing Out (FOMO). FOMO is a classic psychological issue in all areas of life, and I’d be surprised if there’s a human being on this planet that’s never experienced FOMO. So, it’s not surprising that traders feel FOMO in the markets. When the markets move, it’s tempting to want to be a part of the move, even if it means jumping impulsively in a way that does not fit the trading plan.
3. Boredom. Sometimes, people just crave action. The boredom of waiting for a trade to line up is a real trigger to enter trades without the right conditions and eventually overtrading.
More...

Overtrading, you are in effect ignoring risk management totally and the chances of blowing your account and losing all your monies. While, you have to have positions in the stockmarket to make monies, committing most or all of your capital, just because you can is the obvious sign of overtrading. You can and will lose consecutive trades you place in the stockmarket. The only reason to get into a trade is if you have an edge and the odds favor you taking that trade. Not to say that trade is a sure winner but, the reward is several times your risk, putting the odds when the trade works out, very much in your favor.
 
To @mikeriley 's point, in my mind, overtrading means (at least for me) to trade beyond your limits to try to achieve a goal. This involves either trying to trade out of a hole dug, or trying to trade more than a fixed daily target.

I have done both.


Let's say you have a goal of $100 for the day's goal. You reach the goal in a trade or two in a short amount of time and think, "Wow, that was easy! I am reading the markets well today!"

So you try to go beyond your target rather than just shutting down, and start accruing small losses for the rest of the day, and you wind up at BE for day. That is overtrading to a degree.

But it is worse when you have that goal of $100, and keep hitting your stops and lose $100, but refuse to quit at the $100 loss. Now you get into revenge-trade mode, where you start trading more and more to get back to BE. That is overtrading at it's finest. Sometimes it works, but most times it does not.

Just as you should stop when hitting a daily profit goal, you should stop when hitting a daily loss. It goes both ways on both sides of the trade, too. You could overtrade your profit goal and make double. You could overtrade your loss and get back to BE or even get into profit. Or you can just double your loss.
 
'Trading frequently' in of it self isn't either positive or negative.

Many of the commenters have already gone over that there is basically a limitation of positive set ups, and forcing trades will probably lead to no edge.

Overtrading becomes when a trader is forcing trades with little to no good set ups.

What over trading will manifest into is a focus on smaller timeframes. Ultimately leading to making small profits and seeing them destroyed by much larger swings.
 
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