Why Traders Overtrade

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“Hello, I live in Kenya and I have been trading for about a year or so, I have a very big problem with over trading. Please can you kindly advise me, thank you.” Ken J.

Overtrading is a common problem particularly for shorter time frame traders and it can arise for many different reasons, so without knowing your particular trading context – that is what you trade, how you trade, your trading strategy, your motivations, personal styles and your trading and personal history – I have provided a few explanations behind why traders overtrade and some possible solutions, and I hope that in amongst these you will find a solution for yourself.

One of the first aspects to be aware of is when you are overtrading, and when you are not overtrading. It is unlikely that you are overtrading all of the time so it is useful to identify times when you are not overtrading and to see what clues there are as to what is happening in these situations – can you be like this more of the time? By identifying the times when you are not overtrading and doing more of what you do in these situations you can also reduce the amount of times when you are overtrading.

To identify when you are overtrading you will need to have some kind of baseline measure to work from so you can assess there are no parameters to determine when to trade or not so any given price movement or market move provides the temptation to trade. Traders in this situation are very prone to chasing the markets and often find that as they go long the market comes off and as they go short the market rallies. It feels as if the market is out to get them. Does that sound familiar? The most important area that you can focus on is to work on developing a trading strategy which clearly defines what a trading opportunity is whether that be based on price action, fundamentals, technical analysis, or a combination. This will help you to become more selective with your trading.

Boredom – in quiet market conditions, when the trader is spending large amounts of time at the screen there will be times when there are little or no trading opportunities and feelings of boredom can arise. This is a natural part of trading, and is much like the stakeout scenario that the police and special forces operatives encounter, where you are waiting and poised for action. However these situations present the trader with the challenge of being patient and staying out of the market. For some traders this can be very difficult – particularly those who are new to trading, those who are gamblers/trading for excitement, those who are over enthusiastic or those who need to make money. I have provided more details on these below. A really important question to ask yourself is ‘Am I trading to relieve boredom or to make money?’

You need to make money – this is one of the worst situations to trade in. It is a strong and powerful state but also not conducive to good trading as your whole decision making focus is on making money and not on trading your strategy and the two are not always the same. Assessing your financial needs and your trading performance is very important. Anything that you can do to relieve the necessity to have to make money will be a great step forward for you.

Enthusiasm – newer traders like yourself are blessed with enthusiasm. Traders who are entering new markets are using new trading methodologies are also prone to over enthusiasm and a willingness to get involved.  Whilst this enthusiasm is undoubtedly positive there is also the dark side to consider of being over enthusiastic and looking for any opportunity to trade. Maintain your enthusiasm but re-direct it towards developing your ability to trade your strategy when trades appear and to develop the discipline required to stick to your strategy. If you have to trade consider doing it on the simulator/demo account where the costs are obviously considerably lower. Also consider using your enthusiasm to do any reading or development work that may be required or any other trading specific tasks.