When I first started taking trading seriously about a decade ago, I liked the action.
I believed that the more trades I got into, the better the odds of me making money.
Which is only true if you have an edge! Which wasn’t the case for me back then. In fact, I spent the first two years trying to find it.
About ten years later, and over $2.6M in trading profits, it’s safe to say I’ve gotten on the right path.
That said, people now come to me in hopes that I can help turn their trading around too. And more specifically, help them break their bad trading habits.
(My first two years as a trader were opposite of this image, click here to learn how I turned the corner.)
One of those bad trading habits (that even I used to have before I discovered this) is overtrading.
Now, there are a lot of reasons why people overtrade. And it all has to do with psychology and the emotional side of trading.
That said, I’ve come up with some invaluable tips to help you stop overtrading and get you on the road to profitability.
With trading there are good habits and bad habits… some good habits include planning and journaling your trades… on the other hand some bad habits are overtrading, trading on emotions, and without a plan.
Well, one of the worst habits you can have when you’re trading stocks is overtrading… and it’s one of the quickest ways to ruin your account.
Basically, overtrading is buying and selling stocks for no rhyme or reason. In other words, you’re not developing a well-thought-out thesis and don’t have a plan in place.
Now, there are many reasons why one would overtrade, such as forcing trades when they’re bored and trading on tilt.
How overtrading eats at your account
So what can happen if you’re overtrading and just buying and selling stocks because you’re bored or want to make money?
Well, it costs money to trade. If you have an account under $25K… and you trade too much… you risk being locked out of your account.
For example, let’s say you’re able to day trade… and you start to overtrade. Well, let’s say your fees are at $6.95 a trade. If you buy and sell 10 stocks in a day that will actually cost you over $250.
Basically, you’re trading 20 times (paying $6.95 to get in and $6.95 to get out). Let’s say you scratch on those trades, it’ll still cost you $278 ($6.95 * 2 * 10).
Now, that adds up over time… so if you end up losing money on those trades, think about how much that’ll cost you overtime.
On the other hand, if you have an account under $25K and you take more than 3 day trades in a week… you actually break the Pattern Day Trader (PDT) rule… and you would either need to get your account above $25K to continue trading… or risk your account being frozen for a period.
Trading is exciting, but that doesn’t mean you always have to be trading
A lot of people think you have to trade all the time to make money. Well, this leads them to force trades and be in stocks that they probably shouldn’t be in.
However, just because you trade more… it doesn’t mean you’ll make more money. In fact, it could cost you money.
You see, when you trade just to make money… you force trades. In other words, you’re not putting your money on your best ideas. Instead, you’re just trading to trade and placing bets on something you think will happen with a stock… not because you saw a setup you liked… but just because you think a stock is going higher.
Trading on Tilt
Now, another reason for overtrading is trading on tilt, or trading on emotions. This actually happens a lot, as people will revenge trade as a stock moves against them.
Basically, they’ll either double down as a stock is moving against them… trying to catch a falling knife… or they’ll get in and out of a stock multiple times because they think they’re right.
Rather than focusing on the trade itself and their setup… those who trade on emotions really don’t have a reason for being in a stock.
For example, let’s say you notice this pattern in Facebook Inc. (FB).
You see FB consolidating, but still trending higher… and you think it’s a good area to buy as it’s right above support, the blue horizontal line, and will stop out if it breaks below that level.
Well, the stock ends up breaking below that support level…
Successful traders will stick to their plan and stop out on a break below resistance. However, let’s say you actually get emotional and realize you’re down on the trade… rather than stopping out, you actually buy more shares at $177.50, thinking that level will hold.
Sure, you’re basing your add on a specific level… but there’s no real reason for you to be in the trade anymore. That said, that decision to buy more shares is just revenge trading. Let’s say you actually double down there.
The stock trades lower… and then you decide to double down again at $175.
Well, the stock ended up trading a lot lower… and typically what happens when you revenge trade is you take a large loss that you weren’t expecting.
Solutions for Overtrading
One simple way to figure out whether you’re overtrading is to just take a step back and ask yourself, Why am I in this trade?
If there is no clear reason… then you’re just trading to just to trade.
You can also ask yourself, Did I plan this trade?
If you didn’t plan the trade… then it’s clear you’re overtrading.
Now, there’s actually a quick fix… and you probably know the answer: have a plan.
When you have a trading plan in place, you actually have a specific set of rules to follow. You know exactly where to buy, stop-out, and take profits… and I teach my clients how to do that.
For example, here’s a look at a simple trading plan that could help to prevent overtrading.
Off the bat, we know where our levels are… and all we have to do is execute and stick to it.
You can also have hardset rules to prevent overtrading, like only trading 2 symbols a day (if you’re able to day trade) or 5 stocks a week (if you’re a swing trader).
Another quick fix would be to journal your trades. You want to write down everything about the trade, where you got in, where you stopped out or took profits, your edge in the trade, etc. Thereafter, you would review your trades and try to find a pattern in your trading.
Now, having a journal will help you figure out whether you’re overtrading because you can see how many times you’ve traded and whether you actually had a real reason to be in a trade.
Although this is after the fact, you could prevent further damage to your account if you find that you’re trading too much.
That said, the next time you find yourself trading too much or revenge trade, take a step back and assess the situation. If there’s no real reason for you to be in a trade… take the loss and move on until you can find a trading strategy or setup that puts you in a position for success.