Overtrading

Overtrading means trading too often, too large or outside your plan. It is one of the most common reasons traders lose money, even traders with a sound strategy. Each extra trade adds costs and, usually, lowers the average quality of your decisions. The urge to trade more comes from boredom, excitement, frustration and the belief that activity equals progress. In trading, the opposite is often true.

What the research shows#

Academic studies of real brokerage accounts support the idea that more trading tends to mean worse results for individuals. In a well known study of tens of thousands of US households from 1991 to 1996, Brad Barber and Terrance Odean found that the households that traded most earned an average net annual return of 11.4%, compared with 17.9% for the market over the same period. Their 2000 paper was titled "Trading Is Hazardous to Your Wealth". Costs and poor timing explained much of the gap.

Signs you are overtrading#

• You take trades that do not fit your written setups.
• You trade because you are bored or have "not traded today".
• Your number of trades rises sharply after losses.
• Costs are a growing share of your results. See Transaction Costs.
• You feel restless when not in a position.
• You switch markets or timeframes to find something to trade.
• Your win rate and average R fall as trade count rises.

Why traders overtrade#

How to stop overtrading#

1. Define exact setups and only trade those. See Building a Trading Plan.
2. Set a maximum number of trades per day or week.
3. Use a daily loss limit and stop when it is hit. See Maximum Trade Risk and Daily Loss Limits.
4. Schedule trading hours and stay off the platform outside them.
5. Track trades outside the plan separately in your journal and calculate their results. Seeing the numbers is often enough to change behaviour.
6. Use alerts instead of watching charts constantly; let the market come to your levels.
7. Take breaks after losses or long sessions. See Tilt.

Quality over quantity#

Fewer, better trades usually beat many average ones. A trader who takes only A grade setups might trade a few times a week and still outperform a trader making dozens of impulsive trades a day. Waiting is a skill, and doing nothing is often the best trade. See Discipline.

Common mistakes#

• Confusing activity with productivity.
• Ignoring costs on frequent small trades.
• Raising trade count to "make up" for a slow week.

Frequently asked questions#

What is overtrading?#

Taking too many trades or too much size, often outside your plan, which increases costs and lowers decision quality.

How do I know if I am overtrading?#

Warning signs include trades that do not match your setups, more trades after losses, trading out of boredom and costs eating into results.

How many trades per day is too many?#

It depends on your strategy. The real test is whether each trade matches your defined setups; any trade that does not is too many.

Next, learn about the most destructive form of overtrading: Revenge Trading.

Sources#

• Barber, B. and Odean, T., Trading Is Hazardous to Your Wealth, Journal of Finance, 2000