Overtrading is a common problem for novice and experienced forex traders alike. In this post, we discuss the dangers of overtrading and some of the ways you can avoid it.

What is overtrading?

Overtrading simply means entering too many trades in a given period of time. The number of trades you can expect to enter on any given day, week, or month will depend on the timeframe, strategy or instrument you are trading. So, just because you are entering a lot of trades, does not imply you are overtrading.

However, you are overtrading if you are entering trades with low expectancy, and you are entering more trades than you need to. This usually results from impatience, frustration, or trying to force a profit out of the market. The extra trades are unlikely to improve your profitability, and in fact, more likely to harm your P&L.

Overtrading can also take the form of trading with positions that are too big for your account or accumulating too many positions.

Why you should avoid overtrading

As a trader, you should always be trying to increase the expectancy of your trades. That means increasing the win rate, or the reward to risk ratio for your trades.

When you become frustrated, you will often end up entering trades with marginal or even negative expectancy. This may happen when you are trying to make back losses or make profits in a difficult market.

Trading is cyclical. There will be winning periods and losing periods, and there will be periods with lots of opportunities and periods with very few opportunities. The most productive way to manage these cycles is to make sure you preserve capital, energy and mental stamina for the most profitable opportunities.

Overtrading tends to occur during the losing periods and the quiet periods. This can result not just in losses, but in depleting your emotional, mental and physical energy. That means you will not be at your sharpest when the profitable periods arrive. The result is that you may miss the best opportunities and become even more frustrated.

Signs you are overtrading

Most traders overtrade—the only difference is by how much they do so. Unless you are waiting for perfect setups to come along, and then executing them as if your last 10 trades didn’t exist, you are probably overtrading. If your last 10 trades or your account balance has any effect on the way you select and execute the next 10 trades, then you are probably overtrading.

If you trade impulsively, open positions that don’t fit your strategy or repeatedly break your trading rules, you are overtrading. If you find yourself changing strategy or continuously looking for new strategies, you are probably overtrading too.

Another sign of overtrading is that you find yourself desperately looking for trades toward the end of the day because you feel you have to make back losses. In fact, any time you aren’t patiently waiting for trades to come to you, you are probably overtrading.

How to avoid overtrading

By this stage, you are probably wondering how to stop overtrading. There are a few steps you can take to avoid or at the very least reduce overtrading. Here are three ideas to limit overtrading.

Focus on the process

The more mechanical your decision-making is, the less room there is for emotion to creep into those decisions. Even if your trading system is discretionary, you can break the process into steps. The more steps you can put between an idea and hitting the buy or sell button, the less chance there will be of taking marginal trades.

Take a break

When you take a big loss or have a string of losing trades, or if you become frustrated—take a break. This is easier said than done because this is when you become desperate to make up lost ground. But the inability to step away from the screen is itself a sign of overtrading. It is a challenge but developing the habit of taking breaks when you are frustrated is one of the most constructive things you can do.

Score your trades

Any trading strategy will have winning periods, losing periods, and periods with very few trades. Your P&L really isn’t a very good gauge of how well you are trading through these cycles. A better way to track your progress is by developing a method of scoring each trade. You can include the expected win rate, reward to risk ratio, and how well you execute and manage each trade. You can then keep a running total of your average score over the last 50 trades. This will allow you to track your progress irrespective of what your P&L looks like. If you strive to improve your average score, your performance and P&L should eventually benefit.

Visualize the right mindset

Winning traders have a particular mindset. They are very patient, and they calmly execute trades without worrying about the result of any individual trade. Ask yourself if that is the attitude you currently have. If it isn’t, try to imagine yourself with that mindset and try to act accordingly. With enough visualization, your actual mindset should evolve into that of a winning trader.


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