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Friday, May 7, 2010

Overtrading - The Signs and Effects

Overtrading is one of the most dangerous common trading mistakes practiced by traders. They buy and sell more to get more profits, but this often results in big losses and very poor money management. Overtrading can be of two types; the first is trading with more open positions than he can handle (more trades) and second is the risking of most of the capital on a single trade (bad position sizing). Overtrading results in many terrible consequences.

•Capital Loss: Overtrading results in over-exposure to risk and poor risk management which can result in capital loss.

•Poor money management: often the trader opens new positions even when most of his money is still in the market. In other words, he is keener on opening positions than closing them.

•No trading plan: traders can be very engaged in finding new hot opportunities but can be very poor with their position sizes, stop-losses, and price targets. Often, no fundamental or technical analysis is done.

•Behavioral changes: as the number of losing trades increases, traders get angrier, more panicky and frustrated, and search more for opportunities. They usually start to risk more to make up for the losses.

Overtrading can be identified and controlled. The common signs of overtrading include,

•Deviating frequently and too much from the core trading plan/strategy.

•Too much searching for opportunities like subscribing to a number of newsletters, constantly switching news channels, asking others, frequently calling the broker, and so on.

•Trading hurriedly. They feel better when they trade; and so they trade often.

•Over-reacting to price changes and news; getting over-excited or desperate at times.

How to Avoid Overtrading

Overtrading is a 'must avoid' trading practice, yet it is practiced by a high percentage of traders trading stocks, currency pairs, futures and so on. It is not that much a hard-to-overcome habit; one just needs a sound plan...