Overtrading: Why Less Is More in Trading Success

Don’t let this mistake ruin all your profits, and learn how to become more durable and patient in trading to avoid overtrading. Get your emotions under control and become a better trader.

What Is Overtrading?

Overtrading means trading too much, which is a problem for many traders around the world. Many traders believe that the more they trade, the better their results will be. But in fact, the opposite is true.

Why Can Overtrading Be a Problem for You?

Overtrading often leads to poor decisions, increased risks, and lower profits. Focusing on quality over quantity is crucial for sustained success.

Excessive Losses
When overtrading, it is quite common that with a large number of trades, your concentration decreases and losses increase.

Failing to Follow the Trading System
Overtrading is a major factor in breaking your trading plan, which can lead to account loss.

Loss of Capital
Loss of capital is the end result of an uncontrollable number of trades piling up. Increased stress, frustration, and burnout.

What Are the Causes of Overtrading?

Identifying the causes helps prevent overtrading. It usually results from emotional impulses, lack of preparation, or poor management of market volatility.

Psychological Factors

The emotional side of the trader is the biggest cause of overtrading. If you want to be a professional, you have to learn how to work with your emotions and get them under control.

1. Emotional decision-making
2. Impulsiveness
3. Desire for profit and high returns
4. Overconfidence
5. FOMO

Lack of Discipline and a Trading Plan

A trading plan is the basis for successful trading; in combination with discipline, it is a winning combo. Think of a trader as an entrepreneur starting a business. Every entrepreneur who wants to build a successful business needs a business plan. The same applies in trading.

Market Volatility

Markets with high volatility provide more opportunities for entry and also higher gains. However, in these conditions, we may end up with higher losses than we had planned.

Lack of Experience

This cause belongs mainly to newbies, who defend their overtrading by trying new indicators without the necessary learning. In many cases, newbies do not have a trading plan that would tell them what to follow.

Detecting Overtrading

Recognising overtrading early helps prevent deeper losses. Signs include frequent unplanned trades and neglecting proper analysis.

Impact on the Trading Account

Frequent opening and closing of trades without thinking, no risk management, increased profits, or losses. You can read a specific example of a trader who overtraded and have a look at his trades here.

Lack of Pre-Trade Analysis

Before we start trading, we should take the time to analyse the market we are going to trade in and write down possible scenarios. Failure to do this can lead to ill-considered trades and an excessive number of trades.

Increasing Number of Trades During Losses

Improper dealing with losses and following trading is also called revenge trading.

What Is Revenge Trading?

Revenge trading is a reaction to a loss in the form of pointlessly opening a trade to make up for a loss we have. This behaviour often gets us into an even bigger loss.

How to Stop Overtrading?

Establishing a Clear Trading Plan and Rules

Establish rules that select your inputs. Enter only on the terms of these rules.
For example, if the market closes below the MA 50 and forms a smash bar, I enter a short.

Using Trading Limits (Stop-Loss, Take-Profit, Trailing)

Never trade without a stop-loss; it can cost you your trading account if you don’t know what you are doing. Think of your stop-loss as a protection for your account that will save you if you make a wrong move.

Improve Discipline and Self-Control.

Discipline is closely related to following a trading plan and money management rules. Therefore, it is important to work on it. We can improve our discipline and self-control through a good lifestyle, regular physical exercise…

Risk Management Techniques

The Reward-to-Risk Ratio is the amount of risk we are willing to take to the ratio of profit we can earn. For example, we are willing to risk $100 with the expectation that we can earn $300. This would mean a ratio of 1:3. The risk-to-reward ratio is directly related to the win ratio of our strategy.

Give Yourself a Break.

Trading is not about the number of trades but the number of successful trades. A large number of traders tend to approach trading as a normal job where they work 9-5. This behaviour leads to overtrading. Therefore, we recommend you take a break and think about your trades. Don’t have the feeling that you don’t do enough.

Practical Tips for Traders

Trade Analysis

Use technology and tools to track and analyse trades. Keeping a trading journal can help combat overtrading and dig deeper into your trades.

Setting Realistic Goals and Expectations

Setting a goal you want to accomplish can give you motivation and a guiding light on your journey.

Every goal should be built according to the SMART method.

How to Create a Goal According to the SMART Method:

S: (specific) goal must be clearly defined and specific (numerically, factually).

M: (measurable) must be easily measurable (percentage, steps).

A: (ambitious) It should be ambitious in order to have the greatest possible motivation to achieve it.

R: (realistic) The goal must be realistically set. There is no point in setting goals that we know in advance we will not achieve.

T: (time bound) Each goal should have a precise time by which it must be achieved.

Strategies for Long-Term Sustainability and Capital Protection

Create a strategy that is not focused on short-term big gains but on long-term sustainability.
The sustainability of a strategy can be determined by the drawdown indicator. This indicator can tell us your maximum capital drawdown for a given strategy.

How to Calculate the Maximum Drawdown

MDD = (L – P) / P
The formula for the calculator is the lowest portfolio value reached minus the maximum portfolio value reached. Divide all this by P, the highest portfolio value achieved, and then multiply by 100 for the result in percentages.

For Example:
The peak value is 100 million.
The lowest portfolio value is 75 million.
(75 million – 100 million) ÷ 100 million = -0.25 x 100 = -25%
It means that the maximum drawdown on your account was -25%.

Key Takeaways

• Overtrading stems from emotional impulses, lack of discipline, and poor preparation, often resulting in unnecessary losses and broken trading plans.
• To combat overtrading, traders should follow a structured trading plan, use strict risk management (like stop-loss and take-profit), and maintain a trading journal for regular analysis.
• Overtrading can ruin even the most promising trader. Patience and a solid strategy always outperform impulsiveness. For deeper insights into the psychology behind overtrading, watch our performance coach Nelly’s video on our YouTube channel.