Overtrading is perhaps the most prevalent trading mistake that traders make. This article will fully explore over-trading and provide some solid tips to help you overcome this extremely destructive emotional trading problem.
- Are you over-trading? If you don’t know if you are overtrading, then you probably are. In fact, most traders who are not making money consistently in the markets are overtrading, whether they realize it or not. The problem with overtrading is that it can be difficult for the trader to know if they are doing it or not because it has many different ways of “sneaking” up on you without you realizing it.
- The best way to stop over-trading is before you start… As we just discussed above; because it can be difficult to realize you are over-trading when you are “in the moment” of trading, it is best to simply go on the offensive against over-trading by planning your trading strategy and trading plan in advance.
- Overexposure… Another way many traders end up over-trading is by over-exposure to correlated Futures markets. For example, trading the S&P emini and the Nasdaq emini is essentially like taking two nearly identical positions since the indices are very correlated and move in a similar manner. So, you have to be aware of this and make sure you are not doubling-up your position. Even if there are two valid and high-quality setups in both markets, you would not take both, you would use your discretionary price action trading skills to pick the better of the two setups and stick with that one.
- Less IS More… If you really want to stop over-trading you are going to have to realize that less is more in the markets. Unfortunately, many day traders come into the market with the opposite attitude; more is better. Aspiring traders tend to think that more trading is better, more indicators are better, more analysis is better, more hours in front of the computer is better, etc. However, this is definitely NOT the case and you need to understand this if you want to stop over-trading…
- You can control yourself, not the market… Simply put; traders over-trading are trying to control the market…you need to honestly stop and ask yourself if you think you feel like you are trying to control the market. Once you realize and fully ACCEPT that you really have NO control over the market, you will begin to think differently
For example, if you have committed to learning and mastering a solid trading plan, do you still find yourself making erratic trades? Not having a trading plan is a very easy way to start over-trading. Traders who have not yet mastered price action trading and developed a trading plan around it are very likely to over-trade mainly because of a lack of focus. This is because a lack of focus tends to be riddled with lower-probability trade setups that often tempt traders to take positions that they would not have taken otherwise.
Another example; do you enter into additional trades just because your current trade is in profit and you’ve moved to breakeven? Was the additional trade setup REALLY valid or did you jump the gun because you were feeling excited about your first profitable position?
There are many other situations in addition to the two discussed above that constitute overtrading. The main problem is that many traders are simply unaware that they are overtrading when they are in the moment. It is very easy to become fixated on a less-than-perfect trade setup and forget about your trading plan and not be consciously aware of whether or not you are over-trading.
Due to the fact that the emotion-inducing situations that occur in the market can sometimes be hard to detect and sometimes even overwhelming, we have to combat this enemy by planning out our trading plan and trading strategies while we are away from the market and not in any trades…
We can think of trading as a sort of war. The war basically boils down to your logical or objective brain mechanisms vs. your “fight or flight” or emotional brain mechanisms. It is extremely difficult to override thousands of years of human-brain evolution…especially “in the moment”. The best way to win this war is to make a comprehensive trading plan, and stick to it…passionately.
I would bet money on the fact that if you are reading this right now, and you do not have a tangible and practical trading plan, you are probably over-trading. It is absolutely essential to create a trading plan and follow it if you want to get on and stay on the right trading path. All traders must do this in the beginning to develop the proper trading habits of logical and objective trading rather than emotional trading. Trading the markets naturally induces emotion and emotional trading…so if you don’t purposely make a plan to counter this reality, you are almost certain to over-trade.
This point of over-trading by trading too many instruments at one time also brings up the point that over-trading is basically the same as over-leveraging your trading account. Some traders get lulled into thinking by taking multiple positions they are diversifying or spreading their risk out, but in fact most of the time they are just adding risk by taking a larger position spread out among multiple markets. You should view over-trading as two emotional trading errors in one; over-trading AND over-leveraging, because by over-trading you are also risking too much money.
Spending too much time in front of your charts induces over-trading because you will over-analyze the nearly limitless amount of market-related variables out there and end up “manifesting” signals that aren’t actually there.Learn to trade only high probability strategies, if you can do this you will greatly reduce your chances of becoming a chronic over-trader. Remember, over-analyzing leads to over-trading.
Obviously, in the beginning of your trading career you’ll need to spend more time with the markets because you’ll need to learn and master your strategy, but once this is done there really is no point in sitting in front of your computer for hours trying to “figure out” what is going to happen….because you can’t “figure it out”, all you can do is master your trading strategy, develop a plan and routine around it, and follow it with discipline.
Also, many traders try trading 15 different trading patterns or setups or who knows what else. My price action strategies are effective yet concise; my setups condense many redundant candlestick patterns into a handful of powerful price action strategies that are easy to learn and to trade. If you look at any candlestick book you will soon realize many of the patterns are very similar and this tends to confuse traders, I have eliminated this problem with the way I teach price action. It helps to eliminate trade frequency / over-trading by focusing your attention to a more refined set of trading strategies, instead of spreading your focus out over too wide a spectrum.