Trading Psychology · Intermediate · 5 min

Overtrading

You can recognize overtrading, estimate what trading costs do to a frequent trader's result and set a limit on the number of trades.

Doing something feels better

You sit in front of the chart for an hour and nothing in your plan appears. It feels like wasted time. So you take a trade that is almost a setup, then another one.

Many traders know this pattern. It feels productive, but it rarely is. Each extra trade costs money, and the trades taken out of boredom are usually the weakest ones.

More trades, more costs

Overtrading means trading more often, or with larger size, than your own plan calls for. It is less about a specific number of trades and more about trades that do not meet your rules.

Common causes:

Boredom. Quiet markets make waiting feel unbearable.
Recovering losses. After a loss, the urge to trade again rises, as the lesson on revenge trading showed.
Overconfidence. After a few wins, every small move looks like an opportunity.
Screen time. The more hours you watch, the more possible trades you see.

Overtrading hurts in two ways. First, every trade pays costs: the spread, often a commission, and for some products financing or currency fees. A small cost per trade adds up fast at high frequency. Second, the extra trades are usually lower quality than the planned ones, so they also add losses.

Research supports this. In Barber and Odean's study of 66,465 US households, those that traded most earned 11.4% a year, while the market returned 17.9%, largely because of trading costs. A study of Taiwanese day traders from 1992 to 2006 found that less than 1% of the day trader population was able to predictably and reliably earn positive returns after fees.

The fix is to make trading less frequent on purpose. A plan that defines your setups, plus a cap on trades per day or week, turns waiting into part of the job.

2,000 becomes 400

A fictional trader makes 400 trades in a year and earns a gross gain of 2,000 before costs.

Spreads cost about 2.75 per trade on average: 1,100 in total.
Commissions cost 1.25 per trade: 500 in total.
What is left after costs is 400, just 20% of the gross gain.

Now suppose the trader had taken only the 100 best setups, which produced most of the gross gain. With costs of 4 per trade, those trades cost 400 instead of 1,600. Fewer trades would likely have left a larger net result, and far fewer hours at the screen.

Common mistakes

Measuring yourself by activity. A day without trades can be a good trading day.
Ignoring small costs. A few units per trade become large sums over hundreds of trades.
Dropping to smaller timeframes to find more trades. More signals also means more noise and more costs.
No cap. Without a written limit, every quiet hour becomes a reason to trade.
Counting only the trades you remember. Check the full statement. The forgotten small trades add up.
Treating every move as a setup. Most price movement is noise, not an opportunity.

The takeaway

Trading more than your plan calls for adds costs and weak setups. Fewer, better trades usually leave more.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap what is left of the gross gain after costs.

Tap the chart.

Of 2,000 gained before costs, only 400, or 20%, is left after 400 trades with spreads and commissions.
2Which of these is a typical sign of overtrading?

Boredom, the wish to be active and the urge to recover losses lead to trades outside the plan.
3In Barber and Odean's study, which households earned the lowest returns?

The most active households earned 11.4% a year while the market returned 17.9%, largely because of trading costs.
4Which rule helps against overtrading?

A cap forces you to choose your best setups instead of taking every possible one.

of 4 correct.

Sources

Back to Trading Psychology