Why Do Traders Overtrade?

Gambling and excitement

The trader is trading the markets for excitement and for fun, rather than for profit; much the same as most people who play in the casino.

Solution

If your goal is purely to have fun and to create excitement, then you need to accept the fact that profitability is unlikely. If you want profitability from your
trading then you need to make a shift in your motives and goals away from fun and excitement towards a more professional and structured approach, with
trading profitably as your desired outcome.

 

No strategy

The trader has no defined strategy and therefore there are no parameters to determine when to trade or not. Hence, any given price movement or market
move provides the temptation to trade.

Traders in this situation are very prone to chasing the markets and often find that, as they go long, the market comes off, and as they go short, the market
rallies! It feels as if the market is out to get them. Does that sound familiar?

Solution

The most important area that you can focus on is to develop a trading strategy with an edge and a positive expectancy!

 

Boredom

In quiet market conditions, when the trader is spending large amounts of time at the screen, there will be periods when there are little or no trading opportunities. This is a natural part of trading! This is the stakeout scenario that the police and special forces encounter.

However, these situations present the trader with the challenge of being patient and staying out of the market. For some traders this is very difficult – particularly those who are new to trading, those who are trading for excitement, those who are over enthusiastic or those who need to make money!

Solution

If you are overly enthusiastic and perhaps new to trading, then you need to balance your enthusiasm of wanting to trade anything that moves with the need to develop your discipline to follow your trading strategy. Patience is a great skill to gain as a trader, so do not see not such fallow periods as time wasted, but rather as time well spent in cultivating this skill. Anyone can place a trade; keeping out of the market and not trading is far more difficult.

For the others, a really important question to ask yourself is, “Am I trading to relieve boredom or to make money?”

You need to make money; you are in a desperate situation This is one of the worst emotions or positions to trade in. It is a strong and powerful state but also not conducive to good trading, as your whole decision making focus is on making money and not on trading your strategy, and the two are not always the same. If your strategy is designed, of course, to make profits – what are you doing abandoning it, in the hope of… making profits!

Solution

Assessing your financial needs and your trading performance is very important. Anything that you can do to relieve the necessity to make money will be a great
step forward for you.

 

Enthusiasm

New traders are blessed with enthusiasm! Traders who are entering new markets, or using new trading methodologies, are also prone to over enthusiasm and a too-great willingness to get involved. Whilst this enthusiasm is undoubtedly positive to a certain extent, there is also the dark side to consider – being over enthusiastic and looking, recklessly, for any opportunity to trade.

Solution

Maintain your enthusiasm but re-direct it towards developing your ability to trade your strategy when trades appear, as well as developing the discipline
required to stick to your strategy. If you have to trade, consider doing it on the simulator/demo account where the costs are considerably lower! Also consider using your enthusiasm to do any reading or development work that may be required or any other trading-specific tasks.