Under trading vs overtrading

Under trading vs overtrading

Do you ever sit there looking at your screen hour after hour, a little tired and bored? You feel like you need some action, but nothing much is happening. You think to yourself, I might as well get long, it’s likely to go up before the Close. So you place your order, even though you have no specific plan or reason for the trade. It’s just something to do, because you’re bored or just because you think you should.

My friend, if that’s you, you are probably overtrading.

Overtrading can be a number of things: trading too large a size for your account; trading too often; or simply putting on trades unnecessarily, and without a trading plan.

Some traders may overtrade because they assume a real trader must trade all day. Others overtrade because they crave the excitement and the adrenalin rush that trading can bring. Still others overtrade because of some frustration they feel in their lives. For them, putting on trades is like playing the lottery: every trade brings hope of success and fulfillment. Others are just plain greedy and hope to make as much profit as possible during the trading day. However, overtrading usually doesn’t pay.

Does trading more mean you make more money than trading less? Not according to studies that have been made. For the most part, over-traders end up churning their own account. Commissions and fees eat up a huge portion of their profits.

The reasons for overtrading are very similar regardless of the timeframe traded. Some traders put on trades for the thrill of making a big win, while others over-extend their trading knowledge or trading abilities. Regardless of the reasons, the net results are the same — their trading accounts are unnecessarily depleted.

One way to stop overtrading is to force yourself to follow a method. A method is supported by a very detailed trading plan. Of course you can develop your own detailed trading plan, in which case you will have developed your own method. Whether it is your own method or someone else’s, it is to your advantage to stick with it. Before you put on a trade, make sure your trading plan is clear. Identify the signals or indicators you will use to monitor the trade. Anticipate which indications will signal when a trade is going against you. Prove your trading plan with real money on the line, and make sure that you have sound reasons for putting on a trade. Make sure you are taking advantage of good setups, rather than acting on the urge to put on a trade. By carefully monitoring your trading plan, you can reduce overtrading and the potential damage it can do to your trading account. Limiting your trades will not only increase your chances of making profits, but you’ll feel a sense of psychological stability that comes with consistently profitable trading.