TheRiskBlog

Overtrading is one of the most overlooked mistakes you can make while trading. As a trader you want to make money any minute the market is open, this is understandable, but it doesn`t mean that you need to trade every opportunity that comes across your screen. Trade the most profitable ones and forget the rest. Here are 5 tips on how to spot and avoid overtrading.

1. Come up with a plan for your account and regularly check your account. If you have been trading for four days it is thursday and you made a lot of profit you can accept almost any trade, but if you lost some money for the last couple days you have to be very careful in choosing your next trade. It needs to be less volatile. So what this means is, that you can trade almost anything and at every time in a winning scenario but you can not do the same when losing. You would be overtrading your account in this situation. So overtrading does not always only depend on the timeline and a boring market, sometimes it depends on what you have made in your account. In other words it depends on your own performance. This is what most people don´t understand about overtrading.

2. Find the flat spot in the market you are trading. Every market has flat spots, find them. For example the US stock markets are pretty boring during the Lunch Break. So during this time it might not be the best idea to follow every news bit you can find and trade it. Use this time to do some research in the market, come up with a good trade and trade it after the lunch break.

3. Regularly check what your account is doing. When you find yourself trading in a slow day but you are not making any money, then stop trading, otherwise you will just be overtrading your account.

4. The next trade is not your biggest opportunity. The trade that makes you the most money is. A lot of traders sit in front of their screens zapping through news, trying to find the next best trade. And most of the times they do find it, or at least they think they did. The world doesn´t stop to turn after todays market close. You will have the same opportunity tomorrow and the next day and next week. Always remind yourself that you can find a good opportunity to wait for. This is a little bit artificial since it only happens once in our lifetime but Berkshire Hathaways stock got splitted last week - for the first time in the history of this company. Now it is a “cheaper” stock, more people can afford to own it, so they will, that is an opportunity.

5. Always check the beta or Average True Range of the stock you are trading. If it shows a daily volatility of $4 but you are only making $0.30 and you have been trading the stock back and forth for the last couple hours you are simply overtrading. You are not making the amount of money you should be, so better stop.

Avoid overtrading where you can, all it does is, it costs money and lots of it. And the bad thing is, most of the times you will not even realize that you are overtrading. So take a good look at the tips we give here, if you find yourself in a situation described above, chances are good that you are stuck in overtrading. Get out of it…

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