Over-trading is one of the most common phenomena in the work of a trader of any level, which can lead to unfortunate consequences. However, traders do not always realize they are over-trading. Instead, they blame it on other factors and, even worse, try to fix it with even more over-trading! If I over-trade without realizing it, this behavior can quickly turn into a negative spiral that destroys my account.
To solve the problem of over-trading, let's break down the answers to the following questions:
- What is excessive trading
- How do we identify its
- How do we fix it?
WHAT IS OVER-TRADING AND WHAT CAUSES IT?
To make money in the markets, you have to make trades. If a trader doesn't trade, he makes zero dollars. It takes a minimum number of trades to make enough profit to justify the effort. Over-trading occurs when one trades outside of the conditions that ensure success. It's hard to tell when the line is crossed because it's a continuation of the successful behavior that produced the money.
Let's use food as an analogy: I need food to stay alive. However, if I overeat or eat the wrong foods, my health deteriorates and even my life expectancy shortens. Nevertheless, I can't completely give up food because I need it to function. Over-trading is similar. I have to trade to make money in the markets, but I can reach a level where the behavior becomes unhealthy.
WHAT CAUSES EXCESSIVE TRADING?
Ultimately, over-trading is caused by a lack of discipline to follow a successful
copy trading plan. There are several triggers, and while this is not an exhaustive list, here are a few of the main causes of over-trading.
The assumption is that money is always supposed to be in the market. There will be periods of slack when the strategy does not produce any trades. It is easy to feel that this is automatically a bad thing because not being in the market means not making money. Nevertheless, an important part of trading is knowing when conditions are not right and that it is more profitable to stay out by paying cash.
Fear of Missing Out (FOMO). FOMO is a classic psychological problem in all walks of life; there is hardly a person who has never encountered FOMO. So it's no surprise that traders feel FOMO in the markets. When markets move, it's tempting to want to be part of that movement, even if it means impulsively jumping in a way that doesn't fit the trading plan.
Boredom. Sometimes people just crave action. The boredom of waiting for a trade to line up is a real trigger for entering trades without the right conditions and eventually over-trading.
THE CLASSIC SYMPTOMS AND TYPES OF OVERTRADING
There are many different ways to overtrade - let's look at the most common ones.
Chasing market movements. This is a symptom of fear of missing out (FOMO). After a big price move, there is a temptation to jump into the market for fear of missing out on more action. But trades initiated by FOMO ignore good entry conditions. For example, the stop loss may be too far away, resulting in a terrible reward-to-risk ratio.
Trading in more volatile markets. Higher volatility is attractive because of the potential profits from large price movements. After all, some volatility is necessary to make money. But a market can't be more profitable just because it's more volatile-it depends on trading skills and strategy. If I can't profit from these markets, I have to leave them alone. Otherwise, I act out of FOMO and probably over-trade.
Over-trade sizes. This is a unique type of over-trading because it does not mean making more trades. On the contrary, it means putting too much capital or risk into individual trades. It is a symptom of greed to imagine profits if a trade wins. You must always consider the consequences of the size of the loss if the trade is unprofitable.
Taking advantage of weak opportunities. In every strategy, some opportunities are stronger than others. Especially in discretionary trading (i.e., non-systematic or mechanical), it is easy to fall into the trap of weak sets that do not fully meet the criteria of a trading plan because of impatience or a desire for more activity.
CONCLUSIONS
Over-trading is easy because it comes from the good intention of placing more trades to make more money. However, the relationship between more trades (or larger position sizes) and profitability is not always positive. After a certain point, we encounter the law of diminishing returns, according to which adding more trades means making slightly less money or even starting to lose money with more trades. u do it right, use the right broker, and don't become the next victim of forex fraud.
