When it comes to trading… it’s easy to let your emotions get the best of you.
However, if you want any kind of success, you just cannot let this happen.
It’s easier said than done, I know.
But don’t worry. Stick with me here…
Trading, with all the profits and losses that come with it, often leads to heightened emotions. These emotions of fear, excitement, or greed, have the power to derail your trading plan, ultimately resulting in overtrading.
And overtrading, as this article shows you, is really bad for your personal net worth.
But we’ll get to that soon…
The consequences of overtrading can be irreversible which is why it’s important to recognize if it’s happening early on. That way you can save yourself from multiple losses, a damaged portfolio, or serious legal consequences (if you happen to be a trading broker).
It might seem like a smart thing to do, opening many positions simultaneously in expectation of hitting a jackpot. But the unfortunate reality is that most of those trades will result in losses and not gains.
This is a mistake many traders make, even those with substantial experience. That is why like everything in life, it’s important to rely on only one thing: common sense.
If you fall into this abyss of overtrading, the smartest thing is to get your trading practices in control before you end up with a damaging result that will eventually become irreversible.
As for smart trading practices, common sense dictates that the best route to take here is the safe one. Maybe with a few small risks here and there that your bank balance can handle.
The thought process I suggest to all kinds of traders is quality over quantity.
If you’re an independent trader (or even a broker) who keeps opening multiple trades in hopes of unrealistic profits, there’s a good chance that the outcome will never be how you predicted it or want it to be, ultimately resulting in big losses.
That is why the best advice is to believe more in the quality of your trades. Keeping this in mind, if you go for moderate yet consistent returns instead of hoping for a one-shot unfeasible return, the chances of you becoming (and staying) a successful trader increases.
That’s why I’ve written this article… in hopes of getting enthusiastic or overconfident traders to slow down and think.
At this point, we can safely establish that it’s best to make feasible and thoughtful trading plans instead of rushing into the world of trading with expectations of big returns.
Clearly, all traders go into it with the best of intentions but at the end of the day, we’re all human. We make mistakes and it’s easy to get swayed by our own emotions (or even other people’s unsolicited advice).
This is something we all have fallen victim to at least once.
So one mantra that traders need to always keep in mind is that emotions or your gut feeling don’t belong in the world of trading. You need to make a trading plan based only on logic and intellect… and then stick to it!!
So… What is Overtrading?
The practice of excessive buying and selling of any financial instrument is referred to as overtrading. Sometimes it is even referred to as churning.
This can be done either by an independent trader or a broker, but the consequences of it are different in both cases.
Firstly, an individual trader here could either be working for themselves or be employed in a financial firm. If they do overtrade, it would go against their personal or the firm’s guidelines regarding how many trades can be made in a day.
But even if they keep trading after a certain limit is reached, no outside legal entity has the power to do anything about it. At most, the individual (or their firm) may end up with a few major losses and maybe damage to their reputation (but with no serious legal consequences).
On the other hand, if a broker excessively buys or sells a financial instrument in hopes of an increased commission, there could be grave legal consequences for it.
Although overtrading is a concern, under-trading is also an aspect to be considered. Both are on the opposite ends of the trading spectrum which makes their results extreme too.
The best practice is to engage in just the right volume of trading.
Everyone has a different trading style and this trading volume is a huge part of it. It speaks a lot about the way they view trading and everything that comes with it.
In hindsight, all of this might seem like an information overload and can be a tad overwhelming to bring into action but once you understand the tactics behind both under-trading and overtrading, it starts to seem plausible to do consistent trading with moderate results.
The Differences Between Overtrading and Under-trading
As their names suggest, overtrading and under-trading are opposites of each other.
Simply put, under-trading refers to little or no trading despite the available opportunities to trade. An instance of under-trading is someone being unwilling to enter a position when they see an opportunity.
The risk of under-trading is heightened if a trader doesn’t use their funds for an extended time, or if they have very strict entry and exit conditions. Sometimes if the trader holds very small positions, they might be at risk of under-trading. Additionally, not having a specific trading plan to follow and just watching stocks as they go often leads to under-trading.
The biggest underlying cause of under-trading is often fear… the fear of losing money.
But if you don’t take the right kind of risks while trading, you won’t only lose out on a lot of good opportunities but also end up with minimal returns that aren’t worth the effort you put in.
Then there’s overtrading…
This, as previously mentioned, is the excessive buying and selling of a financial instrument. The fear here is that not even a single trading opportunity should be lost which ultimately results in bad decisions. This fear and other emotions that lead to a trader overtrading stem from a lot of different factors.
There are only a few good opportunities each quarter. For every 200 trading days, if you are following only one to two trading strategies, only 20-30 trades will be perfect. That means you should only place one trade every six days or so.
Any more than this is overtrading, and something you should look to avoid.
The Main Causes of Overtrading (and the impact this has)
Every trader has their own way of thinking and their own trading style.
But all these different personalities and styles tend to have certain things in common.
And they all share the fact that we’re human and prone to make certain mistakes.
As such, it’s pretty tricky to avoid overtrading as it’s human nature to want to achieve more and more. It is also natural to become impatient and trade continuously, especially when you’re on a winning streak.
I still run into this problem about 4-5 times a year!
Yes, even someone like me who’s been doing this for years and built a $11+ million portfolio does overtrade from time to time. And I have to catch myself when I’m doing it.
So you’ll never escape this problem, but there are certain common factors you can look out for, including:
1: Analysis paralysis
In the internet age, there isn’t a lack of information about any topic.
Anything and everything under the sun has so much data about it on the internet that it’s virtually impossible for anyone to go through even a fraction of it.
So when you try to “lookup” a certain topic, you’re hit by this tidal wave of information which can be very overwhelming to consume all at once.
Yes, this information can be helpful but it comes with the baggage of being too much information. What was supposed to make a trader feel at ease in the first place has now become a major inconvenience and weighs heavily on their shoulders.
They feel obligated to take in as much information as possible which in turn defeats the purpose of all of this data being there to make things easier.
This mountain of information that appears with just a click of a button does more harm than good. It ultimately leads to over analyzing of the data by a trader, hence resulting in what we call Analysis Paralysis.
It might seem like having all these choices is a good thing but often it only leads to more confusion. It starts becoming a mental block for a trader just trying to do their best. They find themselves in this continuous loop of overthinking and making absolutely zero or all kinds of decisions at once.
The term Analysis Paralysis might sound extreme but it can actually lead to traders feeling anxious or even having crippling frustration. It’s not a good look for anyone, let alone traders who need to be quick on their feet and remain calm while making trade decisions.
Like any problem though, there are some known solutions for the problem that is analysis paralysis. Every trader should accept the fact that not every single trade you make will turn out successful. If you have a well-thought-out trading plan, some of those trades might work but some of them might also fall through which is okay.
It’s only natural.
Additionally, it is best to keep it simple and trust your intellect rather than emotions.
Trading is just as much about your mindset as it is about skill and technique, so stay in touch with how you’re feeling and don’t let it overpower you. Keep your emotions under control, don’t let them affect your trading, and be practical as often as you can.
Every now and then, take a step back, take a deep breath, and really think about your strategy.
In addition to strategies, patterns are things I have found to be valuable in having the confidence to trade day in and day out in such a volatile profession, without over or under trading. They keep us on the right track. Getting used to identifying patterns can help you build confidence in your trading.
The thing is, you won’t find effective patterns for free online. You won’t find them in books. In fact, you likely won’t find these patterns anywhere for free.
You yourself will have to put in the work to create and identify successful day trading patterns.
This takes time and experience. But trust the process.
2: Emotional Trading
The name here is self-explanatory. When you let your emotions take the front wheel while trading instead of following a trading plan that’s based on logic, you’re engaging in Emotional Trading.
Letting your personal emotions take over while taking important decisions isn’t really the best way to trade. In rare instances, it might seem to work but that is often just a coincidence.
Usually, it is a very bad idea to rely on your emotions while making trades.
These days trading psychology is talked about a lot and it dictates that the stability of your emotions and mental state are incredibly significant while trading. Keeping your emotions in check is one of the biggest strengths of a good trader. It might seem implausible to achieve but with consistent practice it is possible.
Most people fail at day trading not because of how risky it is, but because they don’t keep their emotions in check.
They go by their gut feeling, which essentially makes their trades like gambling.
3: Poor Risk Management
To define Risk Management simply, it is the method by which investors can first identify, then measure and analyze the risk for various trading decisions.
This is done before deciding to accept or mitigate risk.
Therefore any time a trader accesses the risks involved with different trades before making a decision, they’re essentially doing Risk Management. It’s like anything with risk really. For some, the idea of jumping out of an airplane might be absolutely ridiculous but for others, the thrill of it might be worth the small risk. To each their own.
The simple goal of risk management is to help a trader cut down losses. So when it’s done poorly, the chances of the trader having to bear heavy losses becomes much higher. It isn’t something that should be underestimated at any cost since it can easily lead to a trader overtrading.
Unlike other factors, poor risk management is a subjective cause of overtrading and one has to go by their own standards to risk-taking and determine what one can handle.
Remember to determine how much risk you are comfortable with. Proper risk management ensures you keep your losses to a minimum and don’t spiral out of control.
4: Following Bad Advice
It’s human nature to want to give unsolicited advice. And when one goes out to seek some wise advice, there will always be a lot of “so-called experts” waiting to give out their opinions like they are facts.
Although, even if someone’s advice is good, there’s no guarantee it’s the advice you need.
And because there is so much advice out there (most of it unnecessary and incorrect), this can lead to even more Analysis Paralysis.
This deluge of information can lead a trader to overanalyze, overthink and ultimately overtrade.
Every trader knows their own trades and their overall financial situation better than anyone. So when it comes to receiving advice or going out to explicitly take it, traders should remember that there is no one-size-fits-all advice with trading. Taking advice from each and every corner will overwhelm you. And of course, lead to mistakes and losses.
The smartest thing to do here is to take advice from those you trust, preferably with more experience and success than you, but then go by what feels right.
Don’t be gullible enough to blindly follow your broker’s or even your fellow trader’s advice on anything. Be clever about it and use common sense.
How to Avoid Overtrading?
None of these common pitfalls are unavoidable.
There are ways to avoid each of them, in order to not overtrade.
Listed below are some common ways I’ve found works…
1: Create Clear Goals
Knowing exactly what you want to achieve by making trades and setting clear goals is the first step to avoid any kind of overtrading. If you’re well aware of the path you want to take while trading, it becomes harder to stray away from that path.
Make sure your goals are practical. If you’re keeping your risk at 1%, your goal for profit should be around 2% or more.
Fix percentages that work for you to keep you in this day trading game for the long run.
2: Have A Trading Plan
As you start this new venture, you cannot do so in a random fashion.
You need a plan with strategy and goals.
Currently, invest some time building this plan.
It’s critical that it includes risk management and an exit strategy.
In general, keeping a limit of a 1% to 3% potential loss, the risk remains low as a whole and gives you room to trade more in a day. I call this The 1% rule!
It signifies the maximum risk you take is no more than 1 percent on a single trade.
Make a trading plan with risk management and stick to it.
Keep certain factors in mind like the size of your capital and your trading style.
I suggest to my students to start with at least $3,000 of capital at the beginning. You can start with less, but $3,000 gives you the leverage you need to build momentum. With this, you set yourself up for potential success from the very beginning.
Create a plan accordingly. Portfolio diversification and stop-loss are some more factors that need to be kept in mind while trying to make an airtight plan for trading.
3: Master YOUR Risk Management
Since we all have our own styles of trading and our own degree of ability to take risks, it makes sense to have your own risk management guidelines rather than using a blueprint.
You need to customize your risk management plan around your trading style and abilities.
Understanding your risk to reward ratio is also very crucial. This involves calculating a profit/loss ratio, which is what you anticipate the profit to be versus what your loss may be on a particular trade.
This allows you to compare the estimated returns of a trade to the amount of risk that’s involved in achieving these returns.
An important question to ask yourself: What is the maximum percentage of overall capital you’re willing to risk?
As we discussed before, a limit of 1% to 3% potential loss works well.
4: Follow The Data (Proven Patterns and Strategies)
Data never lies. It gives a picture of the hard facts that should be considered by every trader before they start trading (or before they take any kind of risk). It’s often said that half knowledge is always more dangerous and it couldn’t be more true for traders doing data collection.
Go through the previous patterns that occurred and strategies that worked for other traders. Study them, analyze them, and consider them before making big trading decisions.
This also includes doing general market research.
Start researching the market you are about to trade in and write down these learnings. Refer to them as needed. At the same time, make a note of your past trading mistakes to avoid making the same ones in the future.
The more you rely on data and facts as a trader, the less likely you would be to face major losses.
5: Partake In A Mentor’s Course
You are not the first or even the last person to come across an issue while making a trade.
There’s nothing new under the sun.
So gaining knowledge from those who have done this successfully before you is a smart thing to do. This also requires you to put in a lot of work before partaking in a mentor’s program.
These days there are several platforms that make it easy to look for them but thorough research about their trading history is very crucial before moving ahead.
The financial world keeps going through major changes every few years, some of them being quite extreme, so when a trader has gone through all of these ups and downs of the trading world and still come out successful, you know they’ve done something right.
It would be wise to also look at their recent trades to see how they’ve been doing in the current market situation.
Their trading style also needs to be taken into consideration since very different styles can result in unnecessary points of conflict.
6: Trade Less, Focus More
A quote by Jack Schwager, author of Market Wizards goes like this, “The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless”.
The more you prepare, research and focus on making a solid trading plan, the easier you will find it to trade. Some traders have even gone as far as to say that their best trades have been easy simply because they prepared well for it.
It’s not so much about hard work, it’s about smart work…
A lot of traders go by the acronym KISS which stands for “Keep it simple, stupid”. It’s short, crisp, funny, and tells you everything you need to know about trading.
Be well prepared, stay focused, keep it simple and see how making trades becomes a walk in the park for you.
Have a look at my trades for three months here in this article. Even though there was not much activity and I did not trade every single day, I was able to make over $4,000,000.
The lesson here is that you do not need to overtrade to make money.
It is all about quality over quantity.
Your Next Steps…
The pain of having to deal with a big loss is like none other, especially if it happens because of overtrading.
It gives you the impression of doing a lot of work without getting the desired results in return.
Unlike most things in life, in the world of trading, doing more work isn’t directly proportional to getting more success. Rather, it’s inversely proportional. The more you trade while crossing your trading limit, the higher your chances of falling victim to the practice of overtrading.
But if you follow all the guidelines set by you, your firm, or the law, all while being mindful of your choices, you can earn great (and consistent) success while trading.
It really isn’t as difficult or intimidating as it might seem.
For more day trading wisdom, check out this Investing for Beginners series. I’m devoted to mentoring beginners in order to make day trading your primary source of income.
I also encourage you to subscribe to my YouTube Channel, where I share weekly tips and insights into the world of trading (not just explaining how something works, but showing you how it does in the real world–as well as providing info on my own trades and why I make them!)
In addition, join my newsletter which has exclusive insights specifically designed for those getting started in Day Trading.
Finally… if you’re interested in learning from me in my educational program — and joining an ever-growing community of traders committed to trading the “right” way — you may want to check out The Freedom Challenge.
This is my private educational program where I teach my students to develop the skills they need for long-term success. To learn more, visit here.