There are various different definitions for overtrading. If you own a business, overtrading is doing more business than your organization/resources can handle. In terms of forex trading, over trading is trading too much during a short space of time or putting too much money at any position on the market.
Another term for overtrading as defined by Investopedia is when a broker buys and sells stocks excessively so the broker can increase the commissions received. It is also termed as twisting or churning.
But you’re not a broker, you’re a trader so what’s the risk of overtrading? Forex traders are very likely to overtrade. In fact, many forex traders overtrade and miss the signs. So how can you tell that you’re overtrading and how to avoid it.
How to Avoid Overtrading
The first way to fix an issue is to identify it and with overtrading it can be difficult to do so or can it? One of the easiest ways to tell if you’re overtrading is if you’re not making any money. Forex trading at the end of the day is a way to make money and if you’ve been trading for a long time and realize you aren’t making any, then that’s a clear sign that you’re overtrading.
But how do you avoid it?
1. Create a Plan & Stick to it
One of the reasons why many forex traders overtrade is because they don’t have a plan. If you don’t have a trading plan then you’re more likely to trade based on emotion rather than actual thought. This can cause you to risk more than you can afford to lose more in the end.
2. Know When to Quit
Every trader makes money, no matter the amount but not all traders finish the day with a profit. Why? Because they don’t know when to stop. We’ve mentioned before that greed is a reason why many traders before have lost money and that’s because they don’t know when to quit. Having a plan and a daily target for profits is a great way to stop yourself from risking it all and losing it all.
3. Focus on Quality Not Quantity
When you’re trading, focus on better quality and higher yielding trades. This can allow you to yield more gains without trading a higher volume which will decrease your chances of overtrading. It will also decrease the losses you may incur if the market moves against you.
At the end of the day, overtrading is something every forex trader is vulnerable to so it’s important for you to stop, plan and execute so you don’t overtrade and lose in the end.