Overtrading in the Forex Market and How to Avoid it

08 July 2020

Overtrading is a process of buying and selling Forex pairs, stocks, or other securities excessively. It involves trading all-day without stopping and eventually, making ineffective decisions that lead to financial ruin.

A crucial overtrading definition, the one that every trader should realize, is that this is purely a psychological issue. It involves traders’ emotions and how they manage them during the actual process of trading. When a trader doesn’t have a well-envisioned plan for what exactly they want to achieve in trading, and when they don’t limit their time on the market, they tend to end up trading excessively, i.e., overtrading.

Because it is a psychological issue, traders can use different self-correction techniques to avoid overtrading. In this article, we will take a look at five ways a trader can refrain from overtrading:

Have a trading plan
Refrain from trading all-day
Limit the number of trades per day
Take time-off after a serious loss
Set stop loss and take profit limits to your trades

By using these techniques, a trader can have a top-to-bottom strategy and understanding of how much they want to gain, how much they don’t want to lose, and how many trades are enough in a single day.

What are the signs of overtrading?

Overtrading on financial markets, be it Forex, stocks, metals, etc. refers to a process of buying and selling securities excessively. It is an issue that both beginners and experienced traders can have. It occurs when people don’t stop trading and, eventually, lead themselves to financial problems.

Furthermore, it is important to note that the causes of overtrading are associated with trading psychology and the way traders handle their emotions during the process. It occurs when traders haven’t completely (or at all) realized their expectations from trading. Instead, they execute trades without a systematic trading plan. In short, it is their emotions and greed that leads traders to overtrade on the market.

Now, because it is a psychological issue, there are ways of changing the attitude people have towards trading. Through self-correction and conscious decision-making, traders can give up a malicious habit of overtrading.

Some tips on how to prevent overtrading

In this article, we will talk about 5 ways a trader can improve their emotional responses towards trading and avoid Forex overtrading. These ways are:

Having a trading plan
Refraining from trading all-day
Limiting the number of trades per day
Taking time-off after a serious loss
Setting stop loss and take profit limits to your trades

Let’s discuss each of these techniques in detail.

The importance of a trading plan

This first technique is applicable to any trader, whether they have a problem of overtrading or not. Having a trading plan can introduce order and structure to the process of trading and make traders more conscious about their decisions.

Here’s what a trading plan should look like: it should indicate a specific instrument that a person wants to trade; a specific time of the day when they are planning to execute trades; an approximate amount of gains they want to make and losses they’re willing to take.

In short, a trading plan should provide a course of action for the day and keep a trader aware of their realistic expectations. Following these self-made rules is one of many overtrading solutions; it can help traders realize that it is better to know the exact time when to trade instead of buying and selling securities chaotically.

Don’t trade all-day-long

One of the important characteristics of trading Forex is that it hardly looks like an 8-hour job where you have to open new trades and close old ones all the time. In trading, what matters most is seizing the right opportunity, which is not something that one can achieve by trading all-day-long.

But perhaps more importantly, sitting in front of a screen 8+ hours a day can inevitably exhaust a person and impair their ability to make well-thought-out decisions. And in many trader’s experiences, this can be one of the major indicators of overtrading: thinking that you need to trade all-day-long for success when all you really do is trade excessively and ineffectively.

So, instead of that, it is better to choose a small time-frame and place trades when you feel like the opportunity is right. But you don’t need to make guesses: there are lots of technical indicators that can help you make more or less accurate predictions.

Limit the number of trades per day

This next advice is related to the previous one and states that the number of trades doesn’t necessarily translate into significant payouts. Instead, what makes the real difference is the effectiveness of individual trades.

After having a successful trade and generating considerable payout, a trader may be enticed to continue trading and get even more payouts. Something similar is true for losses: a losing trade can easily make someone want to open new positions again and again and balance out previous losses. This can also be one of many examples of overtrading: letting greed and anger get the best of the trader, instead of staying rational and cool-headed at all times.

So, here’s the advice: determine a specific number of trades that you want to open in a single day. Make sure you stick with this schedule and whenever you feel like opening just one more trade, remind yourself that there’s always tomorrow, yet there’s a limit to how effective our brain can function in a day.

When you lose, take a time-off

As noted above, losses can be very hurtful and even blinding. They can make a person angry to the extent that their rational judgment is clouded. After a loss, a trader is automatically thinking about placing a new position and restoring their previous account balance.

Unfortunately, that’s not how it usually happens: blinded by anger and the desire to fix the current situation, some traders tend to overtrade and place too many unsuccessful trades in a day.

So, instead of falling prey to these causes and effects of overtrading, it is typically a better idea to take a time-off and freshen up the mind. By doing that, the anger caused by the recent loss will cool off so that a trader can think more clearly and execute trades more rationally. After losing trades, traders tend to overtrade to cover the losses, and that approach is called revenge trading. Revenge trading is highly dangerous and can blow up trading accounts very fast.

Set stop loss and take profit limits to your trades

Now, even if you ignore the above-mentioned overtrading signs and solutions and can’t help but trade your specific security excessively, there is still a way for you to set a certain limit to your payouts or losses. Beyond that point, you will get a direct signal to stop trading right away.

When setting the take profit limit, it can be a good idea to look at your previous trades and choose the highest payout that you have received. For instance, let’s say your most successful trade during the recent period generated a payout of 1K, you can set the take profit limit to that specific point or somewhere near to it.

The point of the take profit and stop loss limits is to remind you that by overtrading, you are likely to give away some of your payouts because of poor trading decisions; and that’s in a good case scenario. As for losses, if they occur consistently trade after trade, you may want to limit the number of unsuccessful trades, as well as the amount of losses in individual trades. And a stop loss can be a useful tool for that.

More ideas on how to stop over trading

How do professionals avoid to overtrade forex pairs? What can we learn from them? Professionals are managing a large amount of money, which makes responsibility greater. If you are trading using a 100 USD account, it's very difficult not to overtrade. It's important to have an adequate trading balance before you start trading.

The second idea is to be accountable. Most professional traders have trading journals or sell trading signals that make them more accountable. When you know that you will be saving your trading information on your journal at the end of the day, you will be more selective in your trades.

It's also essential to have saved up fund for drawdown periods. No matter how good your strategy is, every strategy experiences drawdown periods. When you need money to pay your bills, you will overtrade and take bad trades. In addition, it's critical to approach trading as business and not as a tool for gambling.

How to stop overtrading? — Key takeaways

Overtrading is an issue that both experienced and beginner traders can face. It refers to the excessive buying and selling of tradable assets, be it Forex pairs, stocks, commodities, etc.

According to the definitions for overtrading, this is a purely psychological issue that is associated with the poor emotional state of a trader. It usually occurs when a trader is overtaken by the greed of getting more payouts or anger of losing money. Either way, the result is uncontrolled trading that ultimately leads to losses.

But fortunately, there are some techniques that help traders overcome their emotions and lead better trades. In the article, we talked about 5 of these techniques:

Setting up a trading plan
Refraining from all-day-long trading
Limiting the number of trades per day
Taking a break after a loss
Setting stop loss and take profit limits

While these techniques are definitely not everything traders can do to avoid overtrading, they’re still pretty effective in achieving that end-point: not trading excessively.

FAQ on overtrading and how to avoid it

What is overtrading in the Forex market?

Overtrading is an issue associated with trading psychology. It refers to the excessive buying and selling of tradable securities without stopping.

This is an issue that is caused by two emotions that are inherent to us, humans: greed and anger. Greed occurs in trading when a trader has had a successful trade, gained quite a significant payout, and they cannot help but go for just another round. Eventually, placing one trade after the other leads to overtrading that puts traders in a grave financial position.

Anger, on the other hand, occurs when a trader takes a loss. It is no surprise that after a serious loss, a trader wants to open a new trade just to balance out the recent financial hit. However, a trade that is based on anger and rush can hardly ever produce payouts. It is more likely that a trader will fall in a worse financial situation.

What can be an effective remedy for overtrading?

As noted in the article, overtrading is a psychological issue that can affect both experienced and beginner traders. And because it is a psychological issue, there are some self-correction techniques that show how not to overtrade.

One of the most universal techniques is to have a trading plan. By determining the specific trading asset, as well as the time of the day to trade, setting the payout and loss expectations, a trader creates a strict schedule that doesn’t let them go astray and trade excessively.

Another important advice for not overtrading is to realize that trading is not a full-time job, and it's more important to stay consistently successful than to overtrade and lose many times. It is also crucial to limit the number of trades in a single day.

It can also be a good time to take a break after a serious loss. This can freshen your mind and cool off your anger, which is one of the main causes of overtrading. Last, but certainly not least, using stop loss and take profit limits can act as specific points beyond what you’re getting as a signal to stop trading.

How to avoid over trading in forex right now?

As noted earlier about what is overtrading in Forex, the biggest reason why you'd be compelled to trade a certain currency excessively is your mental state. Whether you've experienced a loss recently or have made a huge payout, it's easy to fall into a trap of over trading Forex pairs.

On this page, we discussed various ways you can use to avoid excessively buying and selling currencies in this market. One of those ways is to create a sound plan for your trading accolades. Knowing exactly how much you are going to spend for buying/selling a certain currency pair can help you limit yourself from overtrading in Forex.

Logistical measures can also help you avoid this mistake. Some successful traders point out that by using technical and fundamental analysis, they increased their ability to predict the price movements to a certain accuracy. In turn, this strategy helped them better plan out their trading positions and, once more, avoid overtrading Forex pairs.

How to avoid overtrading in forex?

Avoiding overtrading is not easy. People who need money tend to overtrade. Therefore, it's important to never trade out of necessity. Trading is not a job that will give a steady paycheck at the end of each month. Retail trading is like running your own business, and you are going to experience some drawdown periods. It's critical not to be dependent on the income from trading, and only trade when trading opportunities appear to be profitable. One more reason why some traders seem to overtrade is feeling bored. If you swing trade, there might be days or weeks when you don't get a trading opportunity. To avoid overtrading due to boredom, it's always a great idea to have a side business or a hobby that can take your attention.

How to stop overtrading?

If you are used to overtrading, you need to develop a new trading system. When overtrading becomes a habit, you need clear rules for spotting trading opportunities and executing trades. Having clear rules for entering a trade and exiting are the stepping stone to stopping overtrading. Having a trading journal can also help in this regard. Journals where traders save notes on their trades and explain the reasons for entering and exiting trades increase accountability.

How to control over trading?

Controlling yourself from overtrading is not easy. As we've already mentioned, avoiding trading out of necessity and boredom is critical. In addition, clear rules, journals and or sharing trading ideas with other traders increase accountability and limit overtrading. However, these alone might not be enough. Some traders overtrade because they love gambling. It's important to note that trading is not a place to gamble. Many professional traders go to casinos to kill their need to gamble and when they sit in front of their trading platform, they are trading professionally. No matter which strategy works for you to stop overtrading, it's critical for profitable trading to only trade when great trading opportunities present themselves.