Obsession or addiction to anything is not good for your health as well as for your wealth. Trading is one of the habits many traders do excessively spoiling their overall returns. This is called overtrading which is not good from any perspective, as you can't make a profit on every trade, and it is also not possible for anyone to earn a profit on every trade every day.

If you are also one of those traders, sit daily on your computer screen or smartphone dying to trade even though the market condition is not favourable for the traders. Then, I think this article is meant for you, yes today we are going to discuss about overtrading, its symptoms, causes, disadvantages and how you can stop or control overtrading.

What is Overtrading?

In the stock market, overtrading refers to too much buying and selling of stocks by any individual person. Stock overtrading also encompasses excessive buying and selling of any underlying security on a daily or regular basis, that is also called churning.

Also Read: What to Know Before Investing in Stocks: 10 Things to Consider

In overtrading, traders have too many open positions in multiple underlying securities, they use to trade without any planning and right strategy. This kind of unusual trading practice in the stock market is called the over-trading. Though there are no such rules or regulations for overtrading, hence it is also sometimes difficult to differentiate overtrading from undertrading.

Overtrading and Undertrading

Undertrading is the complete opposite of overtrading. When there is a negligible number of trading activities or you rarely buy or sell the stocks and miss the profitable trading opportunities in the market. When you don't use your money for trading for many days, holding only a few small positions or not buying and selling the stocks it is considered under-trading.

The reasons behind the undertaking could be anything from the fear of losing money to a lack of sufficient funds, unavailability of resources or lack of time to be involved in trading activities. Individuals who don't have technical knowledge or trading or don't have the right trading strategy ready as per the market conditions could be other reasons behind the trading.

On the other hand, as we have already discussed if you don't do excessive buying and selling activities on a daily or regular basis it is known as overtrading. Sometimes market conditions are not favourable for the traders, in such conditions, you should avoid trading. But if you still do that, it could be a sign of overtrading, let's find the other symptoms of overtrading.

Symptoms or Signs of Overtrading

As there are no rules and laws to curb overtrading activities in the financial markets, hence identifying the symptoms of overtrading is very important to stop the traders from losing their hard-earned money in trading. Here below you can find signs of overtrading.

Frequent Short-term Trades: If you are trading frequently for a short period with short-term trading practice, it could be a sign of overtrading. An unnecessary number of trades without the right timing to generate profits are a clear symptom of overtrading.

Also Read: Short-Term Trading Strategies that Work in the Stock Market

High Trading Volume: When there is a high volume of trades generated by an individual trader, it means, he is doing the overtrading. However, if it is done sometimes it is not overtrading, but on a regular basis with the motive to generate profits then it is overtrading.

Trade in Unfavorable Market: When you trade or buy or sell even though the market condition is not favourable for you, like there is too much volatility in the market or uncertainty and you are still trading it means you are addicted to over-trading.

Also Read: How to Trade in High Volatile Market: Best Trading Strategies

Incurring Loses in Trades: When you are incurring losses in most of the trade positions, it means you take quick trading decisions in buying and selling of stocks. Though incurring losses is not necessarily a sign of overtrading, but it happens in too many trades.

Reduction of Capital or Funds: When your capital is reducing, it means you are losing your funds due to overtrading. Excessive trading does not give the guarantee of earning profits every time you trade, instead, you will lose money resulting in your capital loss.

Also Read: What is Profit Booking in Stock Market: Rules & Best Strategy

Trading Without Strategy: Traders who trade without the right strategy usually makes quick decisions to do frequent trades is also a sign of overtrading. To trade with a strategy you need time to perform the technical analysis and find the suitable stocks and best buying or selling levels. There could be many causes, they trade without a strategy and do overtrading.

Causes of Overtrading

The causes of overtrading cannot be specific and can differ from trader to trader, depending on his personal obsession with the profession or addiction to trade in various financial instruments. However, there is an emotional factor that encourages the traders involved in such overtrading activities. However, there are a few more reasons and some of them are listed below.

Becoming Greedy: In the temptation of earning more profits, traders keep trading and indulge in overtrading activities. Becoming greedy in trading is a natural phenomenon, that most traders can't avoid even if they earn hefty profits in a single day.

In Over-excitement: When there is a sudden movement in the market or in the individual stocks, the traders jump into the trades. Over-excitement can occur anytime maybe there is some kind of news in the stock, technical breakouts or sudden fall in the stock price etc.

Also Read: What is Breakout & Breakdown How to Identify Breakout in Stocks

Obsession of Trading: Many traders are addicted to trading, which means they have an obsession with trading every day on a regular basis. Just like the craving for drinking or smoking, some people are obsessed with trading, which pushes them into the swamp of overtrading.

To Compensate the Loses: Traders do not even time make profits, sometimes they incur losses, and to recover such losses, they keep trading which makes them involved in overtrading activities. You cannot compensate for the loss from trading unless you trade with the right strategy.

Fear of missing out (FOMO): Few people trade because of fear of missing out (FOMO), as they feel if they not take any trade position they could miss something in the stock market. Traders don't want to miss any chance; hence they trade on every opportunity causing the overtrading.

Availability of Recourses: This could be the one of biggest reasons behind the overtrading. Yes, owing to the availability of trading resources like user-friendly online trading apps available on smartphones, allowing people to trade at one click with quick fund transfer or buy and sell actions.

Disadvantages of Overtrading

Obviously overtrading has side effects, and if you are also involved in overtrading activities you need to understand what its disadvantages are.

Paying for the Transactions: When you do frequent trades in overtrading, you pay brokerage fees on every buy and sell transaction. This overtrading practice increases your transaction charges which will not only reduce profit margins but also increase the cost of overall transactions.

Also Read: Choosing the right broker: Decoding the mystery of lowest brokerage charges

Wasting Your Precious Time: Involving Unnecessary In trading, means you are spending too much time in overtrading activities. Your time is precious, and you should also utilize it in other activities like learning new things about the stock market or trading to improve your skills.

Earning Unpredictable Profits: In trading, you can earn profits but it will be not consistent, as there is no significant trading strategy you follow that can give consistent profits. In overtrading profits are unpredictable and can be erratic in terms of returns.

Incurring Losses Frequently: There is no guarantee you earn on every profit, you will also incur losses. Overtrading practice will increase your frequency of trades which will also increase your loss counts, making your entire trading experience in losses.

Losing Your Funds Gradually: When you incur the losses regularly due to overtrading, means you are losing your money from your capital of funds. Overtrading causes the loss of money due to inconsistent profits, high probability of losses and high transaction charges.

Emotionally Biased Decisions: When you do overtrading you also involve in the financial and emotional risk. Due to financial risk, you could lose your money which will make you emotionally stressed resulting taking poor decisions in buying and selling stocks.

How to Avoid or Stop Overtrading?

Overtrading is not good for wealth, you need to control this and trade in a disciplined manner. Stopping overtrading will not only save your capital but also improve your earnings ratio from the stock market trading. You will utilize your time in other productive activities or spend time analysing and making a well-informed decision to trade with better profitability. To overcome the overtrading problem we brought eight points that will be useful for you to deal with it.

1. Follow Rules for Trading

To avoid overtrading first of all you have to follow the trading rules. The 80/20 rule is one that says that 80% of your results come from 20% of your actions, which means you can generate 80% of your profit from your 20% right trading strategies. Follow the technical analysis to take action when the technical indicators indicate the buying or selling signals.

Also Read: Top 5 Best Technical Indicators for Intraday or Day Trading

For example, considering RSI, you can buy stocks trading below 30 levels and sell when RSI is above 70 levels. Similarly, following the 50-day and 200-day moving average, when the 50-day MA crosses above the 200-day MA, then you can make a buying decision. Always trade with stop-loss or limit orders and never trade against the market trend, instead trade only when the market is in your favour. These are some of the popular trading rules you can follow.

Also Read: How to Identify Trend in Stock Market: 10 Points to Find Trend

2. Keep Taking Breaks Frequently

Trading continuously without taking a break is not only bad for your health, but also indulge you in overtrading activities. Hence keep taking breaks to get off from your computer screen, it will relax your body and mind and, of course, keep you away from your trading panel. During breaks, you can create alerts to book profits and spend your time in other activities.

3. Avoid Trading for Entire Day

Trading for the whole day from 9 O'clock to 3:30 PM in the market is not the right practice; you are spoiling your daily life in trading. You can take trade positions in the early morning as soon as the market opens, as after a few minutes the market trend is clear and you can take your positions accordingly. During intraday trading you have to close your position on the same day.

And you can set your profit booking price or stop-loss point, the transaction will be automatically executed and you will get the info and updates on your smartphone. Hence there is no need to sit all day in front of a computer screen and trade unnecessarily.

4. Keep Your Emotions in Control

To avoid overtrading you have to keep your emotions like greed, FOMO, and vengeance under control. Greed will stimulate you to trade again and again in hunger of earning more profits. Vengeance will force you to trade to recover your losses from previous trades.

Similarly, fear of missing out (FOMO)motivates you to trade even though there are no trading opportunities. The FOMO will bring you into impulsive trading, making you stay in your trades beyond the exit points, keeping your positions stuck resulting in frustration and anxiety that leads to overtrading. Hence, keep your emotions under control.

5. More Focus on the Investing

The best way to avoid overtrading is also to keep focusing on investing with a long-term perspective. It will not only reduce your frequent trading practice but also enhance your return on the capital you invest in the capital markets. Instead of trading buy stocks from short-term to medium and long-term perspective, and when you get a return shortly you can book profits.

Also Read: Things to Consider Before Buying Stocks for Long Term: 10 points

The best way to overcome overtrading in keep the right combination of trading and investing so that you can get a better rate of returns from your investment and trading activities. Keep an eye on fundamentally strong companies, and find the undervalued stocks, while you can keep monitoring the highly volatile stocks and grab them for trading.

Also Read: Trading or Investing  Which is Better and More Profitable

6. Know Your Risk Bearing Capability

You should know how much risk you can take while investing or trading in the stock market. Never invest or use the fund you can't afford to lose or keep for emergencies. If you have an extravagant amount of money lying in your bank account you can use it for trading, but avoid using the hard-earned money or kept for financial crises and urgent needs.

Also Read: Types of Risks Associated with Investing in the Stock Market

For this, you have to learn the risk management techniques in which you can determine how much maximum amount you are willing to risk on each trade. You have to set the stop loss to control your trading risk or use the position sizing techniques to ensure your risk exposure. This risk management technique will help you to avoid the overtrading practice.

7. Learn When to Step Away

While trading whenever you realize you are moving towards the overtrading zone, you should step away from your trading panel. Take a break or stop the trading for rest of the day and also keep away yourself from market news, newsfeeds, social media or trading applications to see the market activities. Step away from all these things for the day.

This is one of the most crucial actions to control overtrading habit but can be very effective if you follow in your regular trading practice. However, when you have to step away from the market, is totally up to you, as you know how much you traded on that day and where to stop. Stepping away does not mean you left your options open, just close them before stepping down from the trading.

8. Keep Educating Yourself

Educating yourself about trading overtrading and investing related other activities will help you to know the risks and various factors that affect the stock market movement. Instead of always thinking about trading or investing, invest your precious time in improving your knowledge and skills by learning new things, especially about the stock market.

Also Read: What to Research & Analyse Before Buying a Stock of a Company

Learn how to trade wisely using various trading techniques and how to apply the technical indicators or keep yourself updated with economic data, corporate news, companies’ financial results and other events that can affect the movement of the stock market. You can also read tutorial articles on stock market investing and trading or how to avoid overtrading etc.

Also Read: Golden Rules for Trading in Stock Market: Top 10 Basic Rules

Conclusion

Overtrading is the activity of excessively buying and selling stocks, which you can understand when you do frequent trades, incur losses or lose your capital. Becoming greedy and over-excitement are the prime reasons behind overtrading that will cost you in terms of losing your money due to losses, wasting your precious time and losing your wealth over the time.

However, you can control overtrading activities by controlling your emotions, following the trading rules and understanding your risk-bearing capability. The best way to avoid overtrading is to trade yourself, instead trade through your broker who will manage your funds on your behalf and trade with the right trading strategies to minimise the losses and maximize the returns.

Also Read: What are the Most Popular & Profitable Algo Trading Strategies

Here you can choose a discount broker in India like Moneysukh to open demat account and trade in a disciplined manner in various market segments including equity, commodities and forex market. Here you will get one of the best online trading platforms with options to choose yourself manually or through Algo trading at the lowest brokerage charges.

Also Read: How to Choose the Best Trading Platform in India: Points to Check