What is overtrading? How to limit Overtrading?

If investors encounter OverTrading, they will have to spend a lot of effort and assets and suffer losses, so professional investors always try to find ways to avoid OverTrading. So what is OverTrading? What is its nature that it contains so many dangers? What do investors, especially new investors in the market, need to do to avoid OverTrading with Forex?

What is OverTrading?

OverTrading is understood as excessive or overloaded trading, which refers to the situation where buying or selling is done excessively.

Investors who fall into this situation tend to attempt as many trades as possible to recover losses, seeking more profit opportunities, and sometimes even becoming addicted to trading. Executing excessive trades will put them at significant risk, such as falling into illusions. Those without sufficient knowledge of this field may still engage in trading, and the plans and strategies of investors can be disrupted.

When facing OverTrading, investors will encounter many unforeseen consequences. They will erode profits due to the need to pay transaction costs. In such a situation, the success rate of their trades in the market will be low. Accounts will also face significant risks, and the psychological impact from executing these trades can lead to many unpredictable consequences.

The situation of excessive trading occurs due to various reasons. It could be because investors want to increase the frequency of their trades but lack a specific plan or strategy, leading to overtrading and resulting in negative outcomes.

So, what psychological factors lead investors to face OverTrading?

• First, fear: Investors often make many trades to recover losses because they fear losing.
• Second, excitement: Investors are tempted to assert their position without a plan or market analysis.
• Third, greed: Investors seek profit and want to earn even more.

In contrast to OverTrading, there is UnderTrading, which means executing too few trades or even none at all, even when there is a high profit opportunity. When investors do not use their money for an extended period, have very small positions on the exchange, and are very strict with entry conditions, it leads to many missed profit opportunities.

Whether it is OverTrading or UnderTrading, the main cause of these situations is the fear of losing in trading. However, OverTrading results in losses because investors trade too much, which increases the risk of loss. On the other hand, UnderTrading leads to losses because investors do not trade, missing out on profit opportunities.

Types of OverTrading that Traders Often Encounter

OverTrading is often manifested in various forms of excessive trading. To minimize OverTrading, investors can refer to some types of OverTrading below.

• Discretionary Overtrading: Investors use their position size and leverage arbitrarily without setting rules for trading to minimize risks. While flexibility in trading can yield higher profits, frequent overtrading with no clear rules presents high risks.
• Technical Overtrading: New investors often use technical indicators as the basis for their trades. They tend to rely on strategies like Moving Averages (MA), Price Action, and decision-making tools, then trade based on technical analysis. However, investors must realize that no indicator has a 100% accuracy rate, so they need to use a combination of indicators to develop appropriate trading strategies. Relying solely on technical indicators is not ideal, and investors need to continuously learn more related knowledge.
• Shotgun Overtrading: This is when investors buy everything they believe might be beneficial to them. The result is multiple small positions opened simultaneously without any clear plan for execution.

Example: An investor opens 10 different currency pairs based on hearsay, leading to erosion of costs and losses.

How to Recognize if a Trader is Overtrading

To determine if you are experiencing OverTrading, investors can look for the following signs. These signs help investors assess their trading activities, decide whether to continue trading or stop and reassess to develop a better strategy, aiming to optimize profits.

• Frequently executing ineffective trades: If investors make 10 trades but 80%-90% of them result in losses, they should reevaluate the reasons behind this—whether it’s due to impatience, fear, or another cause. When trading in the markets, investors should remember that there are always plenty of profit opportunities, so patience is key. They should wait for a good trading opportunity. Additionally, investors should keep a record of their trades so they can review and analyze them. This way, they can easily assess both good and bad signals and plan the best trading strategies.
• Don’t trade when you don’t fully understand the trade: This is one of the clearest signs of OverTrading. Investors often make trades without understanding them—unclear on why they are buying, why they are selling, and how to set stop-loss and take-profit levels. Each currency pair has its own advantages and limitations, and its volatility differs. For example, if investors trade pairs like EUR/USD, USD/JPY, and GBP/USD but see no profits after waiting for a long time, they might get discouraged and switch to trading USD/RUB in hopes of making a profit. This is a clear sign of OverTrading.
• Switching to shorter timeframes for trades: Investors are often attracted to lower timeframes because they provide many trading signals, and they hope for quick profits instead of waiting long. However, they don’t consider that while there are many opportunities, the quality of trades is lower, making it easier to lose assets. The rush to trade on shorter timeframes, especially if investors lack sufficient knowledge, can quickly lead to losses. To ensure safety, investors should stick to a set time period and avoid rushing into short-term trades just for quicker profits.
• Trading blindly, without following any plan: Having a trading plan is crucial, but sometimes investors trade based on emotions, executing more trades while forgetting their strategy. They often trade impulsively and ignore discipline. Therefore, investors need to be self-controlled and remind themselves to stick to their plan. If your plan is sound, you must follow it seriously to succeed and sustain long-term trading in Forex.

If investors do not engage in day trading, do not make more than three trades per week, and do not set any trading goals for themselves, these are key factors that lead to OverTrading. When facing excessive trading, investors may feel frustrated as other traders are making profits, which leads them to execute trades impulsively, resulting in OverTrading.

In reality, every investor will experience OverTrading at least once, but we may not always recognize it when it happens. You may be tempted by OverTrading when you first start opening positions, executing trades irrationally, and not knowing exactly what you are doing.

See more: What is Volatility? What to Do When the Market is Volatile?

How to Limit OverTrading

With the information above, investors should now have a clearer understanding of OverTrading. If you want to minimize this issue in the most optimal way, follow the steps below:

Step 1: Create a Trading Plan and Strictly Adhere to It

Creating a trading plan is essential for every investor. The more detailed the plan, the better it will be when executing trades. A plan serves as a guide to help investors confidently execute trades to achieve profits and minimize risks.

For the trading plan, investors can follow the method below:

The P.E.A.R. Planning Method consists of 4 steps:

• Create a plan
• Execute the trades
• Analyze the results
• Evaluate the effectiveness of the plan

With a clear plan in place, investors can better control their emotions and mindset. This will reduce the tendency to make impulsive decisions based on luck, helping traders to execute trades more proactively and effectively.

Example of a sample trading plan:

• Goal: Achieve an average coefficient of greater than or equal to 50%, a Sharpe ratio of greater than or equal to 1.5, and a Risk/Reward ratio of greater than or equal to 1.2.
• Capital management: Use a 2% risk rule.
• Strategy: Daily strategy, setting plans and strategies on the 1D chart, executing trades every afternoon.
• Methods: Combine trading methods like Moving Averages (MA), chart analysis, Ichimoku indicators, etc.

This is the first stage where investors can focus more on finding good opportunities to execute trades. Additionally, traders must commit to strictly following the plan they have set.

Step 2: Choose higher timeframes for trading (D1, W1)

Investors are often tempted by the idea of making quick profits, leading them to choose shorter timeframes for trading. However, this usually results in more losses. The more trades made on shorter timeframes, the higher the likelihood of encountering OverTrading.

Example: If an investor trades 20 currency pairs on a 1-hour chart, they would need to monitor about 480 candlesticks in a day. Can they handle this? If they switch to a D1 timeframe, they would only need to monitor about 20 candlesticks. As we can see, observing the fluctuations of thousands of candlesticks in a day does not benefit the investor but only contributes to OverTrading.

In general, it’s important to choose the appropriate timeframe for trading. If you’re a new investor, you might want to consider using D1, while more experienced traders can choose the timeframe that suits them best. However, using the D1 timeframe can help avoid the risk of OverTrading.

Step 3: Set the number of trades per day

This is an effective method that investors can apply. By setting a limit on the number of necessary trades, investors can avoid OverTrading. Once the limit is reached, stop trading. However, don’t overuse this approach, as it could have unintended negative effects.

Example: If you are a swing trader and set a limit of 3 trades per week, once you hit 3 trades, stop. This will help you avoid OverTrading, but it could also mean missing out on potential investment opportunities, so trades should be carried out flexibly.

Step 4: Establish a long-term mindset

If you only have a short-term mindset and want to earn quick profits, it can be a mistake. A long-term plan will help you achieve the best results, without spending too much time or effort.

Typically, most professional investors understand the importance of this concept. Very few people invest in only one currency pair for 6 or 12 months. To adopt a long-term mindset, investors must plan and stick to the plan to achieve the best results.

Here, Forex has provided information to help you better understand what OverTrading is and how to avoid it. We hope that with this information, you will develop proper trading strategies to avoid OverTrading.