Overtrading one of of the major factors of emotional decision making which hurts the discipline trading. Meanwhile it shifts the focus from high probability set up to random levels, chasing impulsive trade, false breakout or breakdown. However it happens due to the loss in a trade, absence of excitement or chasing instant dopamine. Overtrading often disturbs the risk to rewards ratio, trading psychology and trading rules. Success in trading comes from disciplined trading and structured approach to the markets which includes patiently waiting for your setup and stick to your trading system. Apart from disciplined approach to the market there is no either way to get succeed in the market.
What Is Overtrading?
Excessive trades without logic, analysis and without the clear confirmation comes under the overtrading. What factors initiate overtrading.
Boredom: Most of time it happens either the market is ranging or in consolidation phase. Because the market trades with in the same range and doesn’t indicate any confirmation to the any side. That’s the time when overtrading often take place.
Revenge Trading: The very next trade after the losing trade with the loss recovery mindset engage revenge trading.
Emotional Excitement: Just to feel the dopamine, excitement, joy again you start looking for another trade. But the market refuses to give you the trade, now you are placing the trades at the any level just to feel excitement and joy again.
Impatience: When the market isn’t favoring your trade execution conditions but still you trade to avoid fomo and all. That’s how impatience leads to overtrading.
Why Traders Start Overtrading
Traders engage in overtrading when they have lack of emotional awareness which make them think more trade is equal to more profits. It usually takes place when traders think that i need to keep trading in the market in order to feel productive instead of sitting and waiting for your setup. What Reason includes overtrading?
Quick Profits: This is the main cause why traders start overtrading, revenge trading and all. Every beginner trader come to the market in order to generate quick profits and easy money. They start placing random trades in the hope of quick profits.
Loss Recovery Mindset: A loss recovery mindset indicates the urgency of instant loss recovery, which leads to overtrading until the loss get recovered.
Emotional Frustration: When a trade ends on the losing side, this often creates the frustration in the mind because we are emotionally attached to results of the trade. Now the trader engage with another trader hoping to end in his favor but this doesn’t happen, so eventually continuous trade without the analysis and all falls under the overtrading.
In simple words overtrading is one of the fattest way to wipe out your trading capital.
How Overtrading Affects Trading Discipline
When trader engages with the overtrading, it starts hurting discipline, psychology rules and all the other factors which helps you survive in the log run of your trading career. Which discipline factors overtrading hurts.
- Confirmation: In the early stage of the overtrading, the traders often ignore the confirmation before making the entry because if they wait for the confirmation then know it very well which confirmation works for me very and which is not.
- Setup: When a trader starts ignoring the valid and high probability setup, this invites the losses. In order to recover the losses they start doing overtrading.
- Risk Management: Random setup invites random losses and random losses shakes the risk management. Because in random setup you don’t know where is liquidity and where is the stop losses of the other trader’s. Therefore you risk more than your daily limit.
- Emotional Discipline: While engaging with the random setup and random losses hurts the trading discipline, so ultimately these random losses creates fomo or loss recovery mindset which comes under the emotional discipline. That’s overtrading hurts the emotional discipline.
Why More Profits Does Not Mean Trade
Well We humans are built in this way that more is equal to more like more study, more marks, more work, more money, that’s why human mind’s perception is more trade is equal to more profits. However the trading work totally different from the human mind, here in trading less is more, because less trades, more clarity and better results. Let’s understand what leads to taking the more trades.
Missing Trade Quality: When you take more trades, it decreases your trade quality. Because instead of trading at the high quality setup, they start trading on lower setup or even trade when there is no setup. Therefore the trades end on the losing side, that’s how overtrading impacts the trade quality.
Emotional Stress: Engaging with constant trading invites the constant losses which leads to frustration and emotional stress. Human mind is always attached to the money at some extent and whenever a trader got stopped out from the trade they feel bad even pro trade may agree on this. When one losing trade made you feel bad then overtrading will exhaust your mind from the emotional stress of recover the losing capital. That’s how overtrading leads to the emotional stress.
Inconsistent Results: Overtrading drives the inconsistent result because the random trades doesn’t involves the planned risk management and the planned risk management doesn’t deliver the inconsistent results. That’s how overtrading delivers the inconsistent results.
The Impact of Overtrading on Risk Management
However the overtrading often invites the random loses. Although the risk management allows you plan the loses. This the one of the scenario how overtrading affects the risk management. Let’s discuss the other scenario as well below.
Increase In The Risk: While placing the trade at the any level of market often involves the more risk. Because the planned risk creates predetermined levels with analysis.
No Stop Loss: Executing the trade without the analysis of market often creates the fomo of getting stopped out. However no analysis of the level doesn’t give you idea of where to place your stop loss. Meanwhile instead of putting the regular stop loss, the traders often enters with no stop loss.
Increase Lot Sizing: In the hope of recovering the losses instantly, traders often increase the lot sizing. However they think if this trade works out then i’ll recover my all the loses by today itself. But this doesn’t happen and ultimately they blow their entire capital.
How Traders Can Avoid Overtrading
The easiest way to stop the overtrading is to make the clear trading plan which tell you where is your high probability setup, per day trade quantity, maximum risk in a day etc.
Structured Trading Plan: Develop the structured trading plan which consists your tradeable hours, minimum and maximum loss per day limit. Per session trade limit, confirmation types etc.
Focus High Probability Setup: Trade only a+ setup of your strategy. Because the market takes time to tap these levels and it helps you to develop the patience too alongside.
Walk Away From The Charts: After a loss or when the emotions try to take over your decision, just take a break away from charts. Because it won’t create fomo when you won’t see the charts and ultimately the emotions will start fading away.
Focus On The Survival: Instead of making quick money and chasing the every move of the market, just wait for your setup. Because most traders won’t survive in the markets once you survive then you will end up making money from the market. During the survival phase you have seen every phase from emotions to the disciplined approach to the markets. When you know discipline trading is the key to success in the market during your survival phase. Eventually you adapt the behaviour and start behaving in disciplined way to the markets.
Final Thoughts
Overtrading is one of the major reasons why traders won’t survive long in the markets. Because seeing every move is the opportunity to earn, leads to take the emotional decision(overtrading) which brings the unnecessary losses.
Disciplined way of approach to the markets is the key to success in the trading, it requires:
- Patience
- Emotional Control
- Risk Management
- Discipline
Traders who focus on survival rather than focusing on the quick money and all are the ones who make it through the trading.
If you want to know what it leads to chasing every market move, then you can check my previous blog on Why You Should Stop Chasing Every Market Move