Overtrading: five signs you are trading too much

Overtrading is trading more than your strategy calls for. It is hard to spot because it looks like
hard work, and it does damage through two channels: cost rises and decision quality falls.

1. Five signs

• Your trades per week far exceed the signals your strategy actually produces. If
  your rules give 3–4 setups a week and you take 15 trades, most of them are impulse.
• You cannot write down a reason for entering on more than a third of the trades in
  your journal.
• You trade outside your usual instruments and hours — usually because there was
  “nothing happening” on your main market.
• Monthly cost is an unusually large share of gross profit.
• You feel restless when no position is open. This is the clearest sign and the most
  frequently ignored.

2. The cost you can calculate

Suppose your strategy produces 20 quality setups a month but you take 60 trades. At $10 a lot in
cost:

• Cost required: $200
• Cost actually paid: $600
• Surplus: $400 a month spent on trades that were not in the plan

And those 40 extra trades usually carry negative expectancy, so the real damage is larger than the
cost figure.

3. Three root causes

• Mistaking activity for progress. In most occupations, doing more produces better
  results. Trading does not work that way — waiting for the right opportunity is part of the job.
• Fear of missing out. Watching price run while you stand aside is uncomfortable,
  and it pushes people into late entries.
• Needing the stimulation. If part of why you trade is the thrill, trade count will
  always drift upward.

4. How to control it

• Set a trade quota per day or per week. When it is used up, stop — even if you see
  a good setup. That constraint is what teaches selectivity.
• Write a list of entry conditions and only take a trade when all of them are met.
  Three conditions is enough; more and you will start negotiating with yourself.
• Shorten the watchlist to two or three instruments. Watching twenty pairs leads to
  overtrading almost every time.
• Place pending orders and leave
  the screen. You cannot take an impulse trade you are not watching.

5. One misconception worth stating plainly

Anyone receiving a rebate may find themselves thinking
that more trading means more rebate. Arithmetically that is true, and in terms of outcome it is
completely wrong: the extra rebate is always far smaller than the cost and risk of trades that were
not in the plan.

A rebate is what you receive for having traded your plan — not a reason to widen it.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.