Trading in the fast-moving forex market is a challenging task for a complete beginner. There are a lot of things to learn and understand before entering the volatile currency market as a new trader. You need to test your skills on a demo account first as you can’t afford to risk real money before comprehending the technicalities of trading. Eventually, the trading process will become easier and you will be eager to transition to a live account to start trading for real. The advanced trading platforms and modern technology have made online trading easier than ever but many traders fall into the trap of overtrading as an ill-effect of this ease and this habit can destroy your trading career even before you realise it.
Hence, it is important to be aware of the consequences of overtrading and stop yourself from going down this dangerous path. This article can save you from this common trading pitfall as I will be sharing some practical tips to stop over-trading as a forex trader.
Over-trading - When Do You Cross the Line as a Trader?
Trading in the forex market is done to make profits from favourable fluctuations in exchange rates of currencies. For this, you open trade positions based on your analysis of the market situation. If you anticipate a rise in price for your chosen currency pair, you will decide to go long and if you see the possibility of a drop in prices, you will be shorting the pair instead. Basically, you will be trying your best to make profits in any situation and will be placing one, two or multiple orders based on your trading style and strategy. But when it comes to overtrading, you will be entering way too many trades to make more profits or cover the losses that you encountered earlier in a losing streak.
Anything in excess is poison is an ancient quote and it can be applied to anything we do including trading activities. We think we have a higher chance of making a profit while placing a higher number of trades but we tend to forget about the risk of loss and increased drawdown. The problem with over-trading is that it often goes unrecognised until you see a major dip in your trading account balance. There is only a thin line between trading and over-trading. So, you need to follow a cautious approach to avoid crossing this line. It will be hard to stop yourself once you give in to your urges to place one more trade outside your original trading plan.
Those who are serious about trading will always have a well-defined strategy in place and they will also be following some trading rules that they have set for themselves to stay on track. Absence of such rules will only result in mindless speculation and gambling which ultimately pushes you towards over-trading. Now for those who follow a rule-based approach, you may end up breaking these rules under the influence of emotions which leads to overtrading. The thing about rules is that when you break them once, you will feel more tempted to do it again and again which makes you jump on every opportunity that you come across and place random trades without a definite plan or reasoning.
What are the signs of Overtrading?
Irrational decisions and miscalculations - Making rational trading decisions and implementing them with precision are the prerequisites of successful trading. Not every trade ends up being profitable but we can call it a success if the probability of winning was high enough to justify the risk. For this, you need to apply analytical judgment and logical calculations. This involves in-depth analysis of the market situation and the usage of trading calculators for quick and accurate results.
But when you engage in over-trading, you will be making irrational decisions as those who make rational and logical trading decisions won’t be slipping into over-trading in the first place. You will see yourself rushing the trading process, not spending enough time to calculate the possible outcomes which results in a lot of miscalculations and trading mistakes.
Randomness - When you engage in over-trading, you will notice a lot of randomness and chaos as you fail to follow your trading plan and make decisions in a moment of impulse. This point can be connected with the above point where I mentioned a lack of logic and reasoning. In a normal situation, you will be able to find a definite pattern and strategic approach while reviewing your trading history but this pattern will be broken when you look at the trading routine of someone who is placing way too many trades as this is a clear sign of over-trading
Increased drawdown - If you see your account drawdown increasing despite having a profitable strategy, then there is a high chance that your over-trading is eating away your profits. For instance, a trader was placing just 10 trades a day as a part of his scalping strategy and his account drawdown was around 20%. But after a while, the drawdown went up to 50% and while reviewing the trading history, he noticed that he was placing 20 to 30 trades a day. From this, we can conclude that the increase in his losses and account drawdown was caused by over-trading.
How Overtrading Affects You as a Trader?
You will be taking a certain amount of risk while opening any trade position and the more trades you place, the more risk you will be taking as a trader. This increased exposure to risk will naturally lead to excess losses and it can wipe out a major chunk of your trading capital. There are times when traders end up losing all their capital as a result of over-trading. Not to forget about the high amount of trading cost that you will be paying in the form of spreads and commissions. Thus, you will be losing a lot of your hard-earned money which affects your financial well-being as a trader.
Now you might be thinking that those who are filthy rich can still be ok with over-trading as they can afford to lose a huge sum of money. But you need to know that over-trading takes a toll on your mental and physical health alongside your financial health. Those who are over-trading will spend a lot of time and energy monitoring the markets and executing trades which leads to stress, fatigue and health issues in the long run. Hence, over-trading not only results in financial losses but also results in physical exhaustion and mental breakdowns.
Practical Tips To Stop Overtrading
Be Disciplined and Stick to your plan - It is natural to feel a lot of intense emotions during the live trading process. Still, those who follow a disciplined approach will be able to manage their emotions in a way that their decisions aren’t affected. Beginners tend to abandon their strategy or deviate from their plan in the absence of trading discipline. Thus, the first thing you can do to refrain from overtrading is to be disciplined and stick to your plan. You should also prioritise risk management while placing every trade and learn about trading psychology for managing your emotions throughout the trading process.
Take more breaks - You will be surprised to know that the average attention span of a human is 8.25 seconds based on a study conducted in 2015. This is mostly applicable to youngsters as our attention span seems to be shrinking with the advancement in technology and digitalisation. The maximum amount of time for which we can stay focused on a task is 20 minutes and after that we will get distracted and the risk of over-trading is higher. Hence, you need to take more breaks from trading to fight your urge to enter more trades.
Stop trading after a losing streak - When we encounter 2-3 losses in a row, our brain will be low on dopamine and high on cortisol which is a stress hormone. Our brain is wired to complete tasks for dopamine release and this makes us enter more trades until we win. This is something that we need to refrain from and for that, we need to stop trading after a losing streak. You don’t need to make up for the losses right away as the market is always there. You can utilise this break time for reviewing your trades and spotting any mistakes. That way, you will be able to trade better in the next session.
Final Words
Finally, over-trading is a serious issue and it needs to be treated like how you deal with an addiction. Some traders end up overtrading due to greed while others do it to recover their loss. You will also find people who see trading as a means of escape. Either way, you need to let go of this habit as it does nothing but add more fuel to the fire.
