The ease of trading makes the forex market an attractive spot for all types of traders. Anyone can easily access the market and get into trading from any part of the world. All they need is an internet connection, a forex trading account with a broker, and a system or device to use the trading platform. Then, they can start placing trades and earn profits after gaining enough knowledge and skills. The currency market is always open for trading except on the weekends. But, the ease of trading also leads to over-trading, which can quickly drain your trading account.
In this article, you will learn about overtrading, how it kills your account and some useful tips to refrain from it.
How Much Is Too Much? What Is Overtrading?
When you engage in currency trading, you will know that there are no restrictions or limits regarding the number of trades you can place during the day. You can freely place any number of traders if you have enough balance in your trading account. However, the habit of placing and executing too many trades is actually a very harmful activity for a trader. Overtrading can turn your profits into losses even before you realize it.
The tendency to over-trade generally happens after a losing streak. You look at all the trades you have lost and think of placing another trade with the hope of winning and compensating for the losses. You simply keep doing this until you get a winning trade but you may end up blowing up your account if all these additional trades end up on the losing side. There are many reasons for overtrading, but the primary reason is the inability to control emotions.
A trader may start overtrading out of greed or impatience as they simply cannot wait to reach their profit targets. They just want to grow their account as quickly as possible, and for this, they just want to place as many trades as possible, deviating from their actual plan and ignoring the risks. Using trading tools can help reduce overtrading, as traders would know all the necessary values before placing the trade. But, even then, they will have to control their greed if they are winning and fear when they are losing. Trading with discipline is paramount for success in the long run.
The first and foremost thing that one has to do to avoid overtrading is to be aware of your trading habits. In short, you need to know how much is too much and refrain from trading any further. But doing this is not that easy since many of us don’t even realize that we are overtrading while chasing profits. You must come up with a number of how many trades you want to take in a day and how much profit you want to make. The number should be in accordance with your trading capital. In case of any confusion, make use of a profit calculator to determine the right profit amount you need to earn in your own currency to call the day profitable.
How To Know If You Are Overtrading?
- Deviation from your strategy – Do you see yourself placing trades that do not conform with your original trading plan or strategy? Do you place an order even before the price reaches the desired levels for your entry due to the fear of losing an opportunity? If you have answered yes to any of these questions, you need to look back on your trades and see if you have been overtrading outside the scope of your trading style and plan. Those who overtrade often deviate from their strategy and place trades just for the sake of trading. Such behavior is a sure sign of overtrading, and you must be able to recognize this in time.
- Impulsiveness – Do you place orders in a moment of impulse just because the trade setup looked good and find yourself thinking, what should you do next as you didn’t give much thought to the decision? Being impulsive and making sudden trading decisions without proper analysis and planning is a clear sign of overtrading, as you are simply fearful of missing out on a good trading opportunity. If you see yourself being impulsive during a trading session, which is actually alarming and clearly indicates that you are very much prone to overtrading.
- You Don’t Look at the Number of Trades – Most traders start out with a plan to place a fixed number of trades in the initial phase. A disciplined trader will stick to this plan and will stop trading after that point. But if you see yourself ignoring that number, you may have unknowingly gotten into overtrading. Suppose a trader has been placing only around 10 trades based on their strategy, but later on, they see the trading history and realize they placed over 30 trades or so, then they have been overtrading all along.
- Being Irrational – Overtrading is always connected to your emotions as they overpower the rational thinking process. Hence, one way to identify overtrading is to evaluate your own trades by looking at the trading history and see if you were irrational while placing trades. Sometimes, you will wonder why you even entered a trade in the first place, as that position is not backed by logic. You won’t go for such a trade in a normal situation, but you might end up doing that during the overtrading phase.
How Does Overtrading Affect You?
The primary risk of overtrading is losing your capital, as the more trades you open, the more losses you encounter, which reduces your account balance. It increases your account drawdown and will even eat up your profits from other trades. Not to forget the high cost of trading in the form of spreads and commissions that you will have to pay due to overtrading.
Also, the main problem with overtrading is not just about placing too many trades and incurring losses, as the ill effects go beyond that. It can even have a negative impact on your mental health as well as physical health. You will be spending a lot more time and energy trading, which puts you under much pressure and stresses you out.
This again leads to deterioration in your performance as a trader and results in more stress. Many people who over-trade may also turn towards trading as a means of escape from other worries and tensions that they might be facing in their personal life, and in this case, they are not driven by greed but rather trade for the pleasure of trading, which is a type of addiction. Any type of addiction can ruin your life, and overtrading is no different. It can be dangerous for any trader, whether a newbie or an experienced expert.
Tips To Stop Overtrading
- Don’t Get Too Fixated on Your Targets- Almost all traders start their session with a profit target in mind, and if they don’t achieve this target by the end of the planned trade, they will have this urge to place more trades to attain that target. This habit can soon grow into overtrading. So, you should not get too fixated on your targets and learn to stop trading once you place a specific number of trades.
- Use Trading Calculators – Using various trading calculators can save you from overtrading, as each calculator tells you the outcome of your trades, allowing you to make a sound trading decision. For example, a margin calculator can tell you about the exact margin you would need to open a certain position. Similarly, a lot size calculator would tell you about the right lot size you should trade with and so on.
- Trading With Small Capital – Trading with small capital is the best way to stop yourself from overtrading, as you don’t have much funds to risk in the first place. Over-trading on a small account will result in the entire account being blown up, warning you about the disaster that can happen to a big account. So, try to build trading discipline by trading on a small account and learn about different tools designed to make forex trading easier.
- Take Breaks From Trading – Taking breaks from trading can actually change your mindset as a whole. Traders who sit in front of the charts the whole day are more prone to over-trading than those who take breaks. Taking breaks gives you time to relax, think and do the best course of action. So, when you feel like your emotions cloud your ability to think rationally, take a break from trading until you feel calm and composed.
Final Summary
To summarise, over-trading is the direct result of letting your emotions take control over your trading decisions, which is the worst thing to do as a trader. Most of the traders who engage in overtrading are not thinking clearly, and the only way to stop yourself from overtrading is by building trading discipline.
