How To Avoid Overtrading

If you’ve been learning to trade for a while, I’m sure you’ve come across the term ‘overtrading’.

What does it mean exactly?

Well, unsurprisingly, overtrading means being excessive!

But how can you detect when you’re overtrading?

And what about under-trading?

In reality, the reasons behind both are numerous and extremely common to all traders.

So, is there anything you can do about it?

Luckily, these are precisely the topics I’m going to cover for you in today’s guide!

I’ll share some crucial, practical tips on recognising when you’re overtrading…

…and show you how to improve your trading plan to help you eliminate it altogether!

Specifically, you’ll learn:

• What exactly overtrading is, and the starting solution to prevent it
• How having a market selection puts you in a position to profit more and overtrade less
• A risk management technique that keeps losses from overtrading to a minimum so that you can get back in the game as soon as possible

Sound good?

Then let’s get started…

What Is Overtrading and How You Can Avoid It

Overtrading occurs when you enter more trades than you can reasonably handle.

Now, a common situation where overtrading can occur is when you start “revenge trading”. 

Everyone’s been there…

You experience a couple of losses, lose composure, and start going berserk on the markets…

Before you know it, you enter trades entirely outside your trading strategy!

Well, that is just one of many situations where overtrading can occur.

To put it simply, overtrading is often a mix or a combination of the following:

1. Not having a well-defined strategy
2. Trading at random times of the day
3. Hopping from one timeframe to another
4. Revenge trading

So, in summary…

Overtrading mostly stems from not knowing what you’re doing!

In other words, it occurs when you treat trading as a game or gambling instead of a business.

At this point, the start of the solution should be clear by now:

Develop a well-defined trading plan

I know it’s easier said than done, as there are many ways to trade the markets.

But keeping this template in mind will always put you ahead…

Of course, there are many ways to approach the markets, so the type of trading plans will vary from one trader to another.

You can even check out an in-depth guide on some examples here.

Basically, maintaining a well-established trading plan will help you solve 50% of the symptoms that cause overtrading.

So now you may ask…

“What’s the other 50% to help prevent overtrading?”

Simple…

Develop a well-defined trading routine.

This part is just as important as developing a trading plan.

Why?

It separates traders into those who treat trading as gambling and those who treat it as a business!

Having a well-defined trading routine helps you understand the right time to trade.

Say you’re someone who trades off a higher timeframe, such as the daily timeframe…

…well, you only need to check the charts once a day at a specific time.

But if you’re someone who trades a lower timeframe, such as the 15-minute timeframe or less…

…how often do you think it’s best to check the charts?

Surprisingly… the worst thing you can do is to trade all day!

That’s right!

Just because you scalp the markets doesn’t mean you should trade all the time.

(The key in your case is to only trade when there’s liquidity.)

One good example is only trading the London-New York session overlap…

Source: Forex Factory

This means that if I trade the lower timeframes, I only trade between 8 pm and 1 am (at least in my time zone)

And you might be wondering…

“Why this specific session?”

“Why not Sydney and Tokyo overlap?”

Well, it’s the volatility, as you can see below…

Source: Babypips

The market moves the most during the London and New York session.

Take GBPJPY, for example, which had a large-pip movement of around 150 pips during the London session!

To sum this part up, here’s a cheat sheet you can refer to depending on what timeframe you trade:

• Daily timeframe = Check once a day at a consistent time
• 1-hour to 4-hour timeframe = Check once every four hours
• 30-minute timeframe and below = Actively trade only during high-volatile market sessions

Remember, the lower the timeframe you choose to trade, the more important market selection will be.

Knowing when and when not to trade puts your head on an objective level, and this will help you avoid overtrading in the markets.

Now, let’s go deeper, shall we?

Because even though I have shared some broad concepts with you, the question remains…

“How exactly can you tell when you’re overtrading?”

Let me give you more context in the next section…

Market Selection Techniques That Almost Eliminate Overtrading

Here’s the thing…

Shifting the definition of overtrading to only having too many open trades can exclude a lot of edge cases.

I mean, there are trading methods where having 20 open trades at a time can be beneficial!

On the other hand, there are some trading methods with a maximum open trade count of 5 or even less…

So, what are these trading methodologies, you may ask?

They’re right here:

1. Trend Following (H4 – D1)
2. Intraday Trading (M5 – M30)

There are more trading methods out there, but for now, let’s explore these two in more depth…

Trend Following (H4 – D1)

At this point, you may already be familiar with trend following, where you try to capture the trend as long as you can…

And as you can see, if the trend goes in your favor, your trade can last for months!

(even on just one trade!)

Yet, limiting your max open trades to around 3 or 5 will bottleneck your portfolio.

Since following a trend can potentially last for weeks or even months, more diversification makes sense for this trading methodology.

In fact, it could potentially mean 10-20 open trades at a time!

As a trend follower, this means that it pays for you to not only look at the Forex markets…

…but also look into commodities, indices, agriculture, and bonds.

This will give you access to a wide array of uncorrelated markets to trade.

On the other hand, what about intraday trading? 

Intraday Trading (M5 – M30)

With this trading methodology, you must be an active market sniper.

What do I mean?

Market selection

The more active your trading portfolio is on the forex market, the more important it is for you to select your markets carefully.

But… where do you even begin, right?

How do you select markets to trade?

Well, it can be a combination of a couple of tools, but one method that I often use is to trade after high-impact news…

I’m sure you’ve heard a couple of times that you should try to “avoid” trading high-impact news.

In a way, that is true!

You don’t want to gamble which way the news will go and trade before the news release…

…the key is to trade the “reaction” to that news.

Do you get me?

When the news comes out, you don’t want to be in the trade.

Here’s an example of EURUSD in the 5-minute timeframe…

As you can see, you’d only want to take advantage of the setup after the news.

It’s all about waiting for the reaction.

Of course, there are times when the market barely budges on news releases, but it’s worth keeping an eye on nonetheless.

P.S. Credits to Nachodog’s Forex News with Alerts indicator on TradingView

Overall, the principle is this…

• The lower the frequency of your trade, the more open trades you must have (diversification)
• The higher the frequency of your trade, the fewer open trades you must have (concentration)

Make sense?

Great!

Knowing when to trade and how many open trades you should have…

…will go a long way to eliminating the chances of you overtrading the market.

Just keep in mind the reasoning behind your market selection.

Still, mistakes are always going to get made.

Both you and I are humans – and it’s in our nature!

So what if, despite all this, you still find yourself overtrading?

When your emotions run high, and you wake up in the middle of revenge trading?

By applying what you’ve learned so far, the chances of this happening are lower…

…but how can you reduce the damage?

Let me share with you in the next section…

A Risk Management Technique to Reduce The Damage of Overtrading

This section is the most important part: submitting to the “human factor” in trading.

Honestly, the best way to deal with it is to bring on the risk management!

And no…

…not the risk management you already know, limiting yourself to 1% of your account per trade…

Instead, I’m talking about the emergency brake settings!

This cheatsheet is a hidden gem…

Source: Dummy series, Trend Trading

However, you only need to use one that is most relevant to you.

For example…

If you’re an intraday trader, then you’d want to add the following parameters:

• 5% Max risk per trade (trade stop)
• 5% Max risk per day (daily stop)
• 10% Max risk per week (weekly stop)

Again, this is a worst-case scenario, and those values are only a recommendation…

…you alone know what your personality is like!

But in this case, if you’ve hit that 5% loss for the day as an intraday trader, stop trading, re-assess your trading journal, and return the next day.

If you risk 0.5% per trade, then this gives you a ton of breathing room, as it would take 10 losing trades in a row before you hit that 5%.

On the other hand, if you’re trend-following on the higher timeframe:

• 1% Max risk per trade
• 10% Max risk per quarter (quarterly stop)
• 25% Max risk per year (yearly stop)

As you can see, a daily or weekly stop is unnecessary as your trade frequency is lower.

That’s why having a quarterly or yearly stop makes more sense.

Remember, the premise of this section is the fact that there’s a chance that you might still overtrade.

The key is to minimize that impact.

It gives you more breathing room and a chance to stay in this business to hopefully improve.

Sound good?

So, let’s have a quick recap of what you’ve learned today…

Conclusion

Overtrading can occur for many different reasons!

It might be a lack of a trading plan, all the way to poor trading psychology or risk management.

But what I want you to take away from this trading guide is an effort to balance all three.

Create sound risk management, consider your trading psychology, and have a well-defined trading plan.

Breaking it down, here’s what you’ve learned in today’s guide:

• Overtrading can happen when you don’t have a well-defined trading plan or a proper trading routine
• Creating a market selection rule dependent on your trading methodology helps determine when you should and shouldn’t trade, helping to eliminate
• Having a relevant maximum risk cut-off helps reduce the damage of overtrading, making even a “worst-case scenario” simpler to deal with in the overall picture.

Well, that’s pretty much it!

But now, I want to hear your side.

What are some overtrading stories that you have?

Was it after experiencing five trading losses in a row and deciding to throw your strategy out of the window? (who hasn’t?)

Or was it more of a gamble into trading high-impact news before it was released?

Let me know your story in the comments below!