Over-trading is the excessive buying and selling of stocks or services which is also referred to as churning. Over-trading can also be defined in various forms as a term in financial statement whereby there’s an unnecessary expansion in a company’s business, or a dangerous psychological, emotional or mental trading problem.
You might be wondering what psychology, emotion or mental issue has got to do with trading or in this case over-trading. But most traders don’t even know if they are over-trading due to its tricky way of catching up on anyone without prior warning or notice.
In fact, you are over-trading if you do not know if you are or not, because over traders don’t consistently make money while trading. Also traders who have no mastery in price action trading on the daily chart or no profound knowledge on trading whatsoever are bound to over-trade. Though mastery and consistency is the key to success, a good trading plan or strategy is also required, because we never can tell when the charts blow up.
If you’re to look at the word ‘Over-trading’ you might want to come to the conclusion that it means trading multiple times than expected. And you’re right. One grievous mistake most over-traders make is trading again because it already seems like their current trade is going to yield bounteous profits. Mistake! Big Mistake! On their part because it might or definitely would crash.
Like I explained earlier, mastery and consistency is the key to success, but to be really successful, there needs to be a clearly defined definition of money. Many would say it’s just like a puff of smoke. Another thing is the knowledge of your acquaintance with money.
Are you greedy? That’s a key question to ask yourself. Because if you are, trading would always be a gamble to you. And until you deal with your psychological, emotional and mental issues with money, you will never stop over-trading.
In this article, I’d be talking about the causes and effects of overtrading and the possible ways of it being controlled.
Traders can get extremely tied or entangled in the webs of trading that they become schizophrenic, which is, living in their head. However, there are several common problems that may arise as a result of maximizing profit over sane or better judgement treading gently behind also are risks and dangers alongside its consequence.
CAUSES OF OVER-TRADING.
Like I said earlier, emotions play a great role in causing overtrading, your emotional attachment to money, emotions such as
GREED: When a trader looks at the positive return on previous investment or the attractive chart of the present one, he might be tempted to put in another trade to make more money.
ANXIETY: most traders are sometimes overwhelmed by the losses from previous trades, so in order to make up for the amount lost, they put in another trade.
OVER EXCITEMENT: When the market is moving quickly and the profit margin is favorable, traders tend to open more positions than rational.
VENGEANCE: After losing too much capital to unfavorable market, traders tend to put in more trade when it seems favorable as a way to get back at the market and get all their losses back.
OVER EXPANSION: over-expansion occurs when a business has more output than its finances allows but due to increase in pace of production.
SIGNS OF OVER-TRADING
- Ignorance as to whether you’re over-trading or under-trading.
- When output is greater than finances
- Reduction in gross and net profits
- Increased loans
EFFECTS OF OVER-TRADING
LOSS OF CAPITAL
Often times, traders tend to open numerous positions with the hope of hitting it big and is one of the most common than I know that every successful person took certain risks, but then, some risks could be avoided if the brain is put to use.
When you already think your business is doing well and there’s an awareness that seems to have boosted sales and account analysis, a thing as over-trading occurs, making you lose capital and revenues, one thing that’d go down the drain first is your company’s reputation. After that comes total crashing of the business because no one works with a failed company.
EMOTIONAL INSTABILITY: Traders tend to suffer emotionally when the loss encountered is more than their heart and brain can process. Which is why a break is needed after being dealt heavy blows from over-trading.
WHAT DO YOU DO AFTER OVER-TRADING / TERRIBLE LOSS
TAKE A BREAK: Though this might present you to the whole world as a loser, but you’re just recuperating, healing from the damages done by over-trading. You might want to lie low for a while before resuming back to the trading life.
LEARN YOUR LESSON: The reason you’re taking a break in the first instance is not to enjoy life but to take into cognizance the brutalities of over-trading and learning from your mistake, because not only will responsibilities and necessities arise, you will unintentionally need all the money you’ve lost to over-trading.
SET YOUR METRICS: If you don’t set your metrics after implementing the advice stated in 1 and 2, you might end up over-trading again. Set your profit and loss limit for the day or week you’re trading and put a close monitoring on it.
HAVE A TRADING PLAN: A trading plan doesn’t have to be some set of difficult to understand rules but a step by step guideline to trading in order to avoid over-trading. It’s also a set of rules aimed at disciplining traders to trade wisely.
HOW TO OVERCOME OVER-TRADING
- Avoid emotional trading
- Discipline your mindset towards money
- Trade with the amount you can part ways with
- Have a variety of portfolios
- Have a different approach to trading i.e do not go by the old and generic way of trading and expect to get a better outcome.
- Less is more. You trade less, monitor its progress.
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