Overtrading can occur for several reasons:
Emotional Responses: Traders may overtrade due to emotions such as fear, greed, or frustration, leading them to make more trades than planned
Lack of Discipline: Without a clear trading plan or rules, traders might make impulsive decisions and trade more frequently
Market Conditions: In volatile markets, traders might feel the need to act on every opportunity, leading to overtrading
Seeking Quick Gains: The desire for quick profits can drive traders to overtrade, hoping for immediate results.
Seeking Quick Gains: The desire for quick profits can drive traders to overtrade, hoping for immediate results.
Overconfidence: If traders have experienced recent success, they might overestimate their ability and trade excessively.
Lack of Patience: Traders who are impatient for results may overtrade in an attempt to accelerate their gains.
“Have you ever wanted to trade immediately after a loss to compensate for it?
Or have you made a decision to trade immediately after a profit, with the intention of making more profit?
In these two cases, if you execute a trade, you are actually overtrading. If you take a trade without finding a position according to your trading plan, simply to execute a trade, you are overtrading.
In general, any trade made based on emotions such as fear, dislike, happiness, fatigue, anger, revenge, etc., is a form of overtrading.
How Does Financial and Psychological Dissatisfaction Lead to Overtrading?
When capital is low, income is naturally low as well. This situation can lead to feelings of greed and a desire for more income in the trader. As a result, the trader may try to increase their income by executing more trades or increasing the risk of their trades. This behavioral pattern easily leads to overtrading and can cause the trader’s capital to be lost quickly.
Emotional Trading
Emotional trading, which is not based on a trading plan, can heavily impact both the capital and the trader’s morale. Such trades stem from various emotions, including greed for more profit or attempts to recover losses. The best way to prevent this is to adhere to a checklist and a trading plan. The purpose of keeping a trading journal is to examine your feelings at different times and the results that arise from them. In the journal, you should note your emotions before, during, and after trades to identify your weaknesses.
The Role of Revenge in Overtrading
You might think that wanting revenge on the market sounds irrational. Unfortunately, it is a real issue. When a trader enters a position and immediately hits their stop loss or holds onto a trade for a long time hoping for a profit, but ends up with a loss contrary to their expectations, a powerful and dangerous emotion of revenge against the market can develop.
In this case, the trader is willing to do anything and accept any level of risk to achieve profit. Consider this: you entered the market for some reason and ended up losing.
Psychological Discomfort
You may have heard the saying, “Success in financial markets is 80% dependent on controlling emotions and 20% on having financial knowledge.” It is easy to understand that market losers are those who cannot control their emotions. Emotional trading in any market and time frame leads to failure and loss of capital. This is how people end up overtrading in an attempt to recover previous losses and lose all their capital because they failed to follow this simple principle.
A professional trader, whether they gain or lose thousands of dollars, does not exhibit noticeable reactions. In contrast, an inexperienced trader will envision all their dreams and goals as soon as their trade becomes profitable. If the trade starts to lose at that moment, they see themselves as bankrupt, broke, and hopeless. Meanwhile, a professional trader remains clear-headed, confident, and focused.
If you have worked with indicators or oscillators, you might have noticed that sometimes an indicator gives a signal and then invalidates it within minutes. As a result, traders might take the opposite trade thinking they will profit.
The result of such trades is clear: consecutive losses; and following such old patterns eventually leads to failure and despair.
Do Major Traders Use Classic Financial Methods?
The answer is definitely no.
Is it logical to use indicators or various tools for trading in the market if the capital is low? Again, the answer is no.
The only difference is the volume of capital. Just as your capital is important to you, the capital of a financial institution is important to them as well.
Under no circumstances should you use indicators, oscillators, or generally outdated technical analysis methods for trading in the market. The infinite losses from these tools will easily and imperceptibly draw you into an endless cycle of overtrading.
So far, you have learned about the concept of overtrading and the factors that contribute to it, including financial or psychological dissatisfaction, emotional trading, revenge, psychological discomfort, and the use of outdated indicators and methods, which are the main factors leading to overtrading.
inancial and Psychological Dissatisfaction Leading to Overtrading
Low Capital and Greed: When a trader has limited capital, their potential earnings are restricted, which can foster a desire for higher returns. This sense of financial dissatisfaction may drive the trader to engage in more trades or increase their risk to compensate for the perceived lack of earnings.
Increased Risk-Taking: To make up for low profits, traders might increase their trade sizes or take on higher risk positions. This increased risk can lead to significant losses if trades don’t go as planned, exacerbating financial dissatisfaction.
Psychological Dissatisfaction:
Need for Validation: Traders may overtrade to seek validation or self-worth, trying to prove their trading skills to themselves or others. This psychological need can result in frequent trading, often based on emotions rather than a solid trading strategy.
Desire for Quick Recovery: After experiencing a loss, traders might feel a psychological urge to recover their losses quickly. This desire can lead to impulsive trading decisions, resulting in overtrading and further losses.
Emotional Trading
Greed: Traders might act on greed by entering trades in an attempt to secure quick profits, which often leads to excessive trading and potential losses
Fear: Fear of missing out (FOMO) or fear of further losses can drive traders to make hasty trades or overtrade to avoid potential missed opportunities
Frustration and Impatience: Traders who are frustrated with their performance or impatient to see results might trade more frequently, trying to force profitable outcome
Strategies to Combat Emotional Trading:
Adherence to a Trading Plan: Following a well-defined trading plan helps to minimize emotional decision-making. The plan should outline criteria for entering and exiting trades, risk management strategies, and goals.
Maintaining a Trading Journal: Recording trades and emotions helps traders reflect on their decision-making process and identify patterns of emotional behavior that may lead to overtrading.
Revenge Trading
Definition: Revenge trading occurs when a trader, after a loss, tries to “get back” at the market by making aggressive trades to recover the loss. This behavior is driven by frustration and a desire to prove oneself.
Risk-Taking Behavior: Traders engaged in revenge trading might take on excessive risk or trade impulsively, hoping to recover their losses quickly. This often results in larger losses and deeper frustration.