Traders need to think quickly when they buy or sell assets. However, if they fail to follow their trading plan, they could engage in unsound practices such as overtrading. 

Traders who overtrade or micromanage (constantly dabbling with their trades and orders) are the main reasons they fail. Few understand why they overtrade, and even fewer understand how to avoid this costly habit.

Traders are often faced with the same problems addressed in this article. How can they eliminate the issues associated with overtrading? Read on to find out how!

Causes of overtrading

Traders overtrade when they do not adhere to their strategies. To increase their trading frequency, they might feel tempted to trade more frequently without consulting their trading plan, which could result in poor performance. 

Your trading plan can always be modified at any time, adding strict criteria for entry and exit to prevent overtrading.

Emotions: Emotions such as the following can also cause overtrading:

Fear: In an attempt to compensate for losses, traders often overtrade.

Excitement: A rapidly moving market can entice traders to open positions without analyzing them.

Greed: Traders seek to increase profits after making a successful trade.

5 tips on how to prevent overtrading

#1 The 80/20 rule in trading

According to the 80/20 rule, 80% of your results come from 20% of your actions – a widely accepted principle by individuals and businesses. You will sell 80% of your products to 20% of your customers; 20% of your sales reps will close 80% of your deals; 80% of your complaints will come from 20% of your customers; and so on.

A similar rule applies to trading, with 80% of your results being influenced by 20% of your actions. While most traders do not understand the importance of things that are least important to their trading, they can make a massive difference in the long run.

Hence, you should focus on 20% of high-quality trades that bring 80% of your profit. When it comes to quality, never compromise. Look for only high-probability setups. 

#2 Have a managed trading plan

Any trader can benefit from this technique, regardless of whether they suffer from overtrading. It can help traders become more conscious of their decisions if they have a trading plan to guide their trading. 

The following is a sample trading plan. Individuals should specify a specific instrument they want to trade when they plan to execute their trades. It is an estimate of how much they are willing to lose and how much they are willing to gain.

In short, the purpose of a trading plan is to provide a course of action and realistic expectations for the day. To overcome overtrading, traders can follow these self-made rules; by doing so, they can realize that it is better to know the exact time to buy and sell assets instead of doing it randomly.

#3 Don’t trade all-day-long

In Forex trading, you shouldn’t consider yourself to be opening and closing trades continuously for the entire day. Trading all-day-long day long will not enable you to capture the right opportunity, which is the most crucial part of trading.

It may be even more important than sitting in front of a screen for 8+ hours a day, which exhausts us and makes us less likely to make well-researched decisions. Several traders have reported that this is a significant sign of overtrading. Thinking you need to trade all day to be successful when, in reality, you are trading excessively and ineffectively.

The better approach is to choose a small time frame and trade when you feel the opportunity is right. Although you do not have to guess, plenty of technical indicators can give you more or less accurate results.

#4 Limiting the number of trades per day

As with the previous advice, this one states that a large number of trades does not always translate into a large payout. Individual trades make a real difference, not the quantity.

The trader might be enticed to trade again after having a prosperous trade and getting substantial payouts. In the case of losses, opening further positions to compensate for previous losses may put you into more trouble. Traders who allow greed and anger to rule their actions rather than remaining rational and cool-headed can also be considered overtrading.

Stick to your trading plan and determine how many trades you will open daily. Remember, there is always tomorrow, and our brains have a limit to how effectively they can function in a day. 

Stay on track with this schedule, and if you feel like opening just one more trade, keep in mind that there is always tomorrow.

Conclusion

The act of overtrading involves buying and selling trading instruments for an excessive amount. An excessive number of open positions or excessive money spent on one trade can be attributed to this behavior.

It is best to have an effective trading and risk management strategy in place to avoid overtrading.

To ensure you don’t overtrade, you can utilize two practical risk-management techniques: calculating your preferred maximum risk per trade and your risk-reward ratio.

You can begin trading now that you know more about how important it is to choose a strategy and trading frequency. 

Have fun trading!

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