Overtrading is not a rare phenomenon at all - especially right now during COVID-19. It can impact both beginners and experienced forex traders overestimating their trading skills. When we're trading from home more often due to lockdown restrictions, it's easy to slip into bad habits.
When we pull the trigger too often, we are bound to miss more often - especially when trading through automated (or semi-automated) systems. Read on to learn some specific tips on how to stop overtrading.
Tips on how to stop overtrading
What is overtrading?
Overtrading is trading too frequently or too heavily. It can be triggered by severe financial stress, making it difficult to recover from the loss.
The most obvious sign is when you have periods during the week or month where you're making more trades than at other times. If this is driven by emotion and not indicators, it is overtrading - both emotionally and from a system standpoint. Here are a couple of useful tips on how to stop overtrading.
1. Set a weekly limit
We all know that one or two trades per week is the best strategy for success. As a trader, new opportunities can easily distract you from your trading strategy. Learning how to set limits can keep you in the game.
In simple terms, the method works by setting stop losses and take profits on all your positions and when you reach that limit, close out all positions for the week. This stops you from overtrading during peaks and troughs in markets when emotions are often at their strongest.
2. Treat trading as a long-term endeavour
The world of investing is changing. New investors are being trained to trade their accounts in short bursts for quick profits. These methods will not work over the long-term and lead to overtrading. A more tangible goal is to find a trading system that can be implemented on an intraday or swing basis, depending on your account size. By taking a longer-term approach to trading, you will have the ability to ride the waves.
The long-term trend trader may choose to trade the long-term trend until they run out of cash or can achieve their desired risk/reward ratio. Swing traders who correctly identify a potential pattern change or continuation can remain in the trade until their position is no longer working for them. Once a trader accepts that trading is a long-term endeavour, they are in a much better position to avoid overtrading.
3. Diversify your portfolio
Just like any investment, you should have a diverse portfolio - a mix of different securities that hedge your bets. When you do not properly diversify your portfolio, you put all of your eggs in one basket, sort of like that friend who has put all his or her money into Google or Apple. If you want to hedge your portfolio, spread it out.
A well-diversified portfolio offers maximum gains while minimising risk through balance and dispersion among various stocks, asset classes, and currency pairs.
Read our 4 essential risk management tips>>
4. Plan your week ahead of time
Let's face it: following a trading plan is hard. If you don't have a full-time job and can trade consistently, then it's not too difficult to focus on your trading plan when you're away from the market. However, if you have a full-time job, it can be challenging to follow your plan diligently. What ends up happening? Overtrading and missing your ideal targets.
The most important thing you can do to stop overtrading is to plan your week ahead of time. Stock market sessions that you can take part in are pre-announced. Use this information to plan for yourself or, at best, outline some bullet points around what you'll be doing for the week. Then make sure to stick yourself to that plan or try to adhere to as many items on it as possible.
Trading plans do not have to be complicated, so you can build a new one every week or even every day to accommodate changing market conditions.
With the weekly bar chart, you will plan a trading strategy ahead of time and see whether your market analysis is in line with the stock market movement for the week.
5. Avoid emotional trading
Many of us have an unpleasant relationship with the stock market. We get nervous when things go down, and we get giddy and impulsive when things go up.
The basic idea of "How to Stop Overtrading" is to prevent emotional trading. By being emotionally detached from the market, you can conduct yourself with reason and make transactions based on facts rather than impulses.
Trading psychology is the key to successful trading over many years. These simple principles will help you trade better and enjoy your trading experience more. Use a set system for most of your trades, and maintain discipline, control, and structure in your trading.
6. Risk what you can afford to lose
Everyone has heard it before, and everyone knows it: don't risk more than you can afford to lose. Of course, this is easier said than done. But if you want to protect your trading capital, you have to take a step back and consider how important is it for you to adhere to that fundamental rule of thumb.
Investing successfully is not about taking unnecessary risks. In fact, the best investors know how to cut their losses and let their profits run. Trading too many different stocks or using too much of your portfolio in volatile stocks can create much room for error and cause sleepless nights.
As a margin trader, your overall strategy should include position sizing with respect to the amount of risk you are willing to assume. In addition to considering the percentage of margin used in each trade, you should also consider where and how you are trading, the volatility of that market, the time horizon for that trade or investment, and most importantly, your own personal risk tolerance. Position sizing and maintaining proper liquidity will allow you to reduce an unexpected event's exposure and avoid catastrophic loss.