Trading Discipline & Overtrading

Updated: Nov 19

How to identify and avoid overtrading

One of the biggest misconceptions about trading is that it needs a lot of activity; you have to be in an out of positions quickly to make money. Though, it’s true for certain forms of trading, a blanket application of this concept can quickly lead to overtrading and the resulting lack of profits or more likely losses.

Trading Discipline & Overtrading

Unless you are into some sort of high-frequency trading (HFT), with or without algos, trading too much will not help improve your trading results. In fact, too much trading, will leave you frustrated and always anxious.


You will always be on the lookout for trades and take them even when there are no good trades to take. You won't give enough time for your trades to play out and keep switching to seemingly better opportunities, just to discover that you would have been better off had you not made the switch. You will change your trading strategies frequently and flatten your learning curve.


It all results in overtrading, which is the ADHD of the trading world. It’s amply clear that overtrading is not good for your trading and, therefore, needs realization and correction before you label yourself as “not fit for trading”.


Identifying Overtrading


- Lack of planning


You are most likely overtrading if you find yourself diverging from your plans too much. Each trader should have a trading plan and the best of traders never change it midway. If your trading plan takes into account all the contingencies, there is no reason to diverge from it.


Most new traders either don’t have elaborative plans, or they don’t stick to them if they have one. While not having a plan is an outright blunder, not sticking to a good plan is mostly an emotional error. There are many things that can cloud your thinking and take you off your plan.


An example of this emotional error is when you have taken a stock trade as per the plan and it’s working, but your favourite TV anchor mentions something negative about the stock and you close your position. This may work sometimes, but there was no reason to close the trade if your plan had built in all the contingencies including stop loss and market condition.


- Style Drift


(See style drift article here)


Another factor that leads to overtrading is style drift. If you find yourself on the drawing board frequently, devising new strategies to trade, without giving much time to any one strategy, you are most likely style drifting. Frequent changes in style leads to frequent portfolio changes, which in turn leads to overtrading.


One of the factors for style drift can be due to the initial expectations of trading or a particular strategy. A video worth watching on this can be seen here:-

Many traders change their entire positions overnight because they somehow feel that the style they were using doesn’t make money. That happens even when they chose the style based on solid past analysis and results..


One must realize that each style has it’s good and bad days. If you see bad days in one style and move to the next style, you will not only miss the good