Overtrading is putting on trades unnecessarily, arbitrarily, and without a specific trading plan. Overtrading can also be trading with more risk than you can afford, and trading more contracts than you can effectively manage physically, mentally, and emotionally.
Mistake #1: Assuming a real trader trades all day.
Mistake #2: Trading for excitement.
Mistake #3: Trading because you are frustrated.
Mistake #4: Trading from hope; hoping that the next trade will bring you success and fulfillment.
Mistake #5: Trading from greed. Greedy to make as much money as possible every single day.
However, studies show that it doesn’t pay to overtrade. One reason overtrading doesn’t pay is because costs eat up the profits of over-traders; Commissions and fees eat up a substantial portion of their profits. In the study that was made, the over-traders within a given period churned their own accounts at a rate of 250% compared with traders who trade no more than 3 times daily at a turnover rate of 2.4% within the same given period. The gross profit for each group was the same, however the net profit, because of commissions and fees was substantially less for the over-traders.
The reasons for overtrading are similar regardless of the timeframe being 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: unnecessary depletion of trading capital.
One of the best ways to cure overtrading is to force yourself to develop and trade very detailed trading plans. It is to your advantage to develop a specific trading plan and stick with it. Before you put on a trade, make sure your trading plan is clear. Identify the signals you will use to monitor the trade. Anticipate getting out quickly when a trade begins moving against you. Whether your justification is from a method, a system, a chart formation, an indicator, or fundamentals, make sure that you have sound reasons for putting on a trade. Make sure you are taking advantage of a good setup, rather than impulsively acting on the urge to put on a trade. Limiting your trades will not only increase your chances of making profits, but it will also give you the courage of conviction that you need to be a consistent and profitable trader.