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Trading Discipline & Overtrading

Updated: Nov 19, 2022

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

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 days of your old trading style, but also expose yourself to the likelihood of getting into a bad phase of the next style. That would mean eliminating the upside and exposing yourself to further downside.

As of today (7th Sept 2022) all major markets have been in freefall and any long strategy will be suffering, not because the strategy is flawed, but because money has been leaving the markets out of fear, leading to capitulation and despair in many stocks. If you have seen my video on market psychology, you will know that now is likely the time to hold your nerve.

- Quantifying Overtrading

There is no rule of thumb to quantify overtrading, but if you are turning over your account at a very high rate and paying a large part of your profits in trading costs (commissions and spread), you are most likely overtrading.

To figure this out, you have to do some post-analysis on turnover rate in your trading account and your trading costs. It’s not easy to do when your trading isn’t going well, that’s a bitter pill that you have to take to improve your trading.

A good trading plan will by default keep you from overtrading.

Avoiding Overtrading

- Realize

Traders are often not aware that they are overtrading. That’s because they are so immersed in their failure and the rush to quickly make things right that they refuse to take a breather and self-analyze. It’s like continuing to run on a broken treadmill and not stopping to fix it. It will collapse if you don't stop and fix it.

The same is true with overtrading. If you don’t stop at the right time, you will be out of financial and mental capital. Knowing that you are overtrading is the root of the fix. Once you know that you are overtrading, you are more than half-way through. All you then have to do is to take a few steps back and correct it.

- Create and Follow Rules

With experience, trading can be reduced to simply following a set of rules. You build a rule for everything including taking losses, taking profits, position sizing, and dealing with market conditions. A rule book doesn’t only guide you in trading, but also keeps you from making emotional decisions that ruin your account.

Trade as mechanically as you can. This will help with repeatability and reproducibility of your expected trading results, regardless of short term set backs.

- Manage Risk

When you are emotionally drained, the first thing you do is throw risk management out of the window. Overtrading drains you emotionally and leads you to disregard risk management. That’s a recipe for disaster. Always think risk first when you are trading.

- Develop sit-out power

If your overtrading is a result of you not being able to stop trading when there are no good trading ideas, you might have to work on your sit out power. This happens mostly when the markets aren’t conducive for trading but the trader struggles to sit on cash. If you continue to trade a hostile market, your account will suffer death by a thousand cuts.

I have been known to be in 100% cash for months before re-entering the market, but again this is not a subjective decision, this is by default of my predefined plan.


Overtrading can be corrected pretty quickly. You will be amazed with the clarity when you trade with a plan and set of rules. You don’t have to beat yourself on your past mistakes and keep pushing the wall. You instead have to take a few steps back, identify the problem and start afresh. You must develop a long-term mindset as you are not trading for a day or a week or a month, but developing a skill for a lifetime. It’s okay if you take time to build it.

My breakout strategy - 15 page rule book (PDF) is available for all members to use.

My Breakout Scanner -

My Brokerage Account (Interactive Brokers) -

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👍 allthough I would say that it takes more to change a habit than to build one. So if you currently have a faulty habit it might take more than his prescribed 8-13 trades but probably still a manageable number. And one could allways make a challenge out of it; I’m going to execute a 100 (or same nice round number) trades exactly according to plan and then see what happens.

Sep 09, 2022
Replying to

Sounds like a plan.....


Lương Tuấn
Lương Tuấn
Sep 08, 2022

Can you share how to improve trading psychology?

Lương Tuấn
Lương Tuấn
Sep 09, 2022
Replying to

Thank you so much.


I think so much is tied up with emotional reaction, many or perhaps most people are simply not aware.

We are sold on the idea we make rational decisions, and yet it can be fairly easy to prove we don't, we make many decisions based on emotions and then justify with logic.

Good copywriters understand this and will split test, headlines, paragraphs, images, prices etc to find what works best and makes the most money.

This headline change represented a 12-fold increase in responses, and it was all that changed, the product, price and so on remained the same.

"Put More Cash in Your Pocket"

Changed to -

"Put's More Cash in Your Pocket"

My trick (when I remember to…

Replying to

Anyone beliving we make rational decisions need to read Kahneman. In short we have our (slow) rational reasoning to plan and put us in situations where our (fast) emotional reasoning will lead us right - or at least not wrong. Hence - use our rational reasoning to create a rule-based trading system that we are emotionally capable of following.

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