Excessive trading has different reasons, which can be roughly divided into two categories: the first category is emotional decision-making, which is mainly dominated by emotions such as fear, greed, and pursuit of excitement. Some people just keep trading because they want to trade. If they don't hold positions at any time, they may miss opportunities or fail to fully grasp opportunities. They will feel uncomfortable when they watch from the sidelines. Some people over-trade in pursuit of excitement, and some people in order to recover previous losses; the second type lies in the problems of the trading environment, such as: online trading, market fluctuations, and brokers' constant advocacy, all of which may lead to over-trading. Having said all that, there is only one root cause: lack of discipline and inability to strictly follow the trading plan.
emotional overtrading
Trading for thrills: Action freak
Some traders believe that they must stay in the market at all times. They want to hold positions forever, ready to get in at any time. As long as you have money, you will use it as much as possible. Whenever a position is ended, a reverse position is usually established, and there is no intention of temporarily exiting the market to wait for a more appropriate opportunity. I call these people action freaks.
I also used to be a standard action freak, always looking for new trading opportunities instead of dealing with the positions I already owned. I often sit in front of the computer and constantly search for opportunities in each market. I'll start flipping through the charts. Wow! The trend of soybeans has bottomed out, and it is suitable to buy now. Then, pick up the phone and buy 5 soybean contracts. Didn't bother to go any further, didn't analyze the risk-reward relationship of the position, didn't even bother to look at the 60-minute or daily charts, let alone Elliott wave analysis. I don't want to miss opportunities, have empty hands, and let capital go to waste in my account. After establishing the soybean position, I started looking for other trading opportunities, possibly buying yen for the same reasons. In no time, I had created 12 inexplicable parts, none of which had a very clear reason. Holding too many positions at the same time often makes my position losses out of control, because it is impossible for me to take care of so many positions at the same time. Although I will also do some preparations at night, after the market opens, I will be attracted by certain trends, and then I can't wait to take action.
The hardest thing for a trader to learn is not knowing how to resist the urge to enter the market. Anyone who trades on incentives is unlikely to be a good trader. If it is to meet the needs of a certain aspect, the attitude will become sloppy and cannot be studied in depth. Of course, this kind of trade can be profitable occasionally, but it is definitely not the right trade, and the long-term chance of winning is not high.
like a businessman
Traders should treat trading as a career. A businessman will not rush to make a decision, he will carefully consider various feasible options. Traders should frame their decisions in the same way, without rushing. The reason why traders trade is to make money, which is the most fundamental goal. All his actions are to achieve the goal of making money. Taking unnecessary risks is never in line with the business plan. If a trader is not sure whether trading is a career or a tool for excitement, he is a gambler, not a professional trader. Unfortunately, some people get lost in the thrill of trading and don't know how to improve themselves to be the best traders they can be. As long as you treat trading as a career, you will become more objective and your profits will become more stable.
fear of missing out
People overtrade for different reasons, each with their own motivations. In my case, I'm more worried about missing out than chasing the thrill of a deal. If there is a big market for coffee or live cattle, I will never allow myself to miss it. Getting some bad trades has never been a problem for me, as I can find a hole to fall in pretty quickly. After some painful experience and lessons, I know that in many cases, it is not worth entering the market at all. In this case, you should wait patiently for the opportunity that meets the conditions, and don't force yourself to enter the market because you are worried about missing the opportunity.
After a period of tempering, traders will gradually realize that it doesn't matter if they miss some opportunities. Yes, when we observe certain market developments from the perspective of hindsight, we often complain that we have no foresight. But unless these opportunities are originally part of the plan, otherwise, you should try to restrain yourself and wait for the market to pull back before considering entering the market. Knowing that there is a clear trend in the market is not necessarily a good reason to enter the market. Sometimes it is necessary to wait until the proper entry point. Without waiting for the right time to enter, the problem of overtrading can easily arise, because every time a breakout is seen, the trader may want to enter. Cultivating patience and waiting 20 minutes, 60 minutes, or even 3 days until a clear buy signal appears is an impossible task for many traders. They feel that if they don't act now, they will miss out on a huge opportunity. For action freaks, getting them to let go is often difficult. But there are countless good opportunities in the market, so what if you miss a few? In short, be sure to wait for opportunities with high odds and a good relationship between risk and reward.
Some things must be slowly figured out by experience, such as the most suitable market conditions for trading. Trends that fluctuate wildly or develop in sideways ranges often lead to overtrading, but a market with a clear trend is easy to deal with. If the trend is very strong, you don't need to be in and out very often. Proper positions can often be held until the end of the trend. In the face of a market with an obvious trend, it is easy to set a reasonable stop loss, so the stop loss will not be triggered unnecessarily. If you miss an opportunity, you don't need to chase the price, you can wait for the market to pull back to the trend line again. If you are unwilling to wait patiently, the entry price may be far away from the reasonable stop loss point, which will deteriorate the relationship between risk and reward, and the market may undergo a substantial correction. The position established by chasing the price may be good, but it may be washed out, because the price pulls back to the support area, and you can't bear the pain of continued loss and sell at a loss. So, although I was very annoyed, I still couldn't help it, and bought near the next peak. As a result, the whole process started again from the beginning. If you missed the opportunity at the beginning, and the subsequent trend did not return to the trend line, don't force yourself into the market, you should look for another opportunity or continue to wait. This attitude, at least, can force traders to accept only high odds. In addition, price chasing usually has a large slippage spread. To buy in a retracement trend, limit orders can be easily matched. On the contrary, if the price is rising sharply, traders can only use the market order to chase the price, and usually the rising selling price is traded.
In a market with violent price fluctuations, it is easy to over-trade, because support and pressure are relatively difficult to judge, so it is not easy to determine the appropriate entry and exit points. Every time a market looks like it's about to break out, it turns out to pull back. Even if the breakthrough is successful, follow-up movements are often limited. Whenever the market looked like it was about to crash, it rebounded sharply, only to resume its decline 20 minutes later. Sometimes the price fluctuations are violent, but the range is so limited that it is not worth trading at all. In this kind of market, it is difficult to set the stop loss point, so the stop loss is often touched, resulting in too many unnecessary losses. Once many systems encounter violent market fluctuations, they frequently send out trading signals, and the signals keep repeating. Since every false move looks like the real thing, it is also easy to chase the price. In conclusion, traders must resist the urge to chase prices and try to understand the idiosyncrasies of various market conditions.
Eager to recover previous losses
When some traders encounter significant losses, they overtrade and are desperate to save the situation. The cumulative loss of the day, a certain position or the month is getting more and more serious, which is a situation that no one wants to see. But how a trader handles this situation often represents the watershed between success and failure. When encountering a major setback, the most sensible thing to do is to follow the instructions of the money management plan, accept the loss, and let go temporarily. Unfortunately, many traders react in the exact opposite way, trading more frequently or even increasing their position sizes in an attempt to recoup previous losses. When the losses accumulate to a certain extent, most people will lose their ability to think rationally and are eager to recover the losses. Once this kind of mentality appears, the whole transaction will be messed up, the decision-making will become hasty, and the result can be imagined. Note that trading decisions should not be influenced by profit or loss amounts. Traders must understand that everyone has bad trading days and those losses are acceptable. In this case, the pace should be slowed down, not accelerated. In order to recover losses, some traders will panic and even trade in retaliation. This irrational behavior usually leads to worse consequences. Let me repeat that the transaction should not be affected by the existing profit and loss, and always act according to the trading plan and strictly abide by the fund management plan.
retaliatory deal
The problem of overtrading often occurs if you are in a hurry to recover losses from earlier or a few days ago. In order to recover losses, some people will trade revenge. The so-called retaliatory trading is when traders think that the market owes them something, so they will do everything they can to get it back. These traders believe that the market has betrayed them. They keep coming into the market, believing that they are smarter than the market, and intend to teach the market a painful lesson, telling the market that it should not betray them in the first place. We must realize that the market is usually right, and it is also the last laughing winner. Retaliatory trades are characterized by "x xx! I just lost $400 on soybeans, take more contracts on the next trade, and get it back."
I have seen a lot of people (including myself) that if they lose money in the early trading, they will start to have a revenge mentality. In order to recover the previous loss, the trading volume will increase and the entry and exit will become sloppy. What are the consequences? Usually a small loss turns into a disaster. Yes, sometimes it works, and sometimes it does recover previous losses, but that's not the way to win. Be aware that, if unlucky, this mentality could very well destroy your trading account in a single day.
Trading is not an event that lasts a day or two and ends. A losing trade, a bad day or a losing week doesn't really count for much when you look back at the end of the year. Over the course of a year, even the best traders will inevitably encounter many setbacks. Some outstanding traders lost even half of their trades. Losses are an inevitable part of trading and must be accepted. On any day, any week, or any month, if trading doesn't go smoothly at the beginning, there is no need to be nervous, let alone panic. We can accept the loss and start over. Even if it takes a long time to make up for previous losses, that's acceptable. Conversely, if you are unwilling to accept losses and are eager to save the situation, then your trading decisions will be affected by previous profit and loss results, which is not a good sign. Note that each transaction is independent and should not be affected by other transactions. This principle does not apply only to intraday write-offs. Position traders have similar problems, only they usually take longer to bury themselves. Someone might set a profit target of $500 on a single trade, and in the event of a loss of $500, adjust the profit target of the next trade to $1,000. He became more willing to take risks. So, a $1,000 profit target could turn into a $1,000 actual loss. After a few vicious cycles, the situation can easily spiral out of control. He couldn't accept a loss of $1,000, because it accounted for too much of the trading capital, so he had to continue to hold it, and even added a third contract. Before long, the paper losses accumulated to $1,800, and he began to panic. He believes that the market has been impossible to rebound, so it should be short. All of a sudden, he decides to sell 6 contracts (sell the original 3 contracts and go short 3 contracts). Usually this is also when the market starts to rally and traders will be overwhelmed. Now he knows the first deal was the right one. And the market, which has always proven him right, is now short. So he rushed to buy again, and as a result, he may establish a long position of 6 or 8 contracts. Unfortunately, this price rally is just a normal rebound in a downtrend. After the rebound ended, the market continued to fall. At this time, traders may be reluctant to admit it for the time being, but after all, they cannot stop the threat of continued loss expansion, and finally restructure their short positions. The whole cycle starts all over again.
It might sound far-fetched, but it actually happens. I have a client who usually trades only 1 contract, but one day he suffered a loss that he was unwilling to accept, and the last transaction of the day was 20 contracts. I ended up beheading him for margin reasons, but the equity in the account had gone from $17,000 to just over $5,000 just because he wasn't willing to take an $800 loss. That day, his trades generated more than $1,000 in commissions. It took 3 months to grow to $17K, but destroyed 2/3 in one day. After another two weeks or so, the trader called and said he had given up on trading because the constant losses had driven him to utter despair.
This trading style is the most effective way to end your trading career early. If you usually trade 1 contract, don't trade 2 contracts because of a previous large loss. You make your plan while you are awake, and that plan has a function: to keep you from going crazy. If you start to deviate from the constraints of your risk parameters for any reason, stop immediately, because you have started to over-trade. Dealing style can be bold under appropriate circumstances, but some circumstances are not appropriate. If you like to add to your position when things are going your way, start off with a small volume. If you can trade 5 contracts, you may wish to try with 2-3 contracts at the beginning. If the situation is good, you can consider increasing the size, or change the next transaction to 5 contracts. However, the so-called good situation is definitely not when a loss occurs. If you don't increase your trading volume when you are losing money, it is not easy to cause a situation out of hand. Losses are usually within reason and can be easily recovered in the future.
I learned this hard lesson very early on. I was very impressed with everything that happened that day. Shortly after the market opened that day, I quickly racked up a $1,000 loss because I was trying to guess the bottom of the market. At the time, losses of $1,000 were a lot of money, and I ended up letting them cloud my judgment. In the next transaction, I did not maintain the usual trading volume of 1-2 contracts, but shorted 5 contracts, hoping to recover the previous loss in one breath. However, almost at the same time I entered the market to sell short, the computer program also entered the market, sending the market sharply higher. Before I knew it, another $2,000 was lost. At this point I stopped praying for a pullback and decided to reverse my short position into a long position of 5 contracts. That's right, at the same time I turned short into a long position, the market began to correct downward. I got another big slap in the face. I've had bad luck all day long, making irrational, hasty decisions and increasing the size of my trades. When the dust settled, it was discovered that the $20,000 account had a total loss of over $7,000 in capital. I get anxious, over trade, and try to get revenge. If I accept the loss of the first trade, and then take a short break to calm my mind, I may be able to find the pulse of the market again, and at the end of the day, at most, I will only suffer a normal level of loss, and I may even make a small profit. However, the actual result is not the case. It took me 3 months afterwards to barely close the financial hole and psychological trauma. That's not to say it's the last time I make a similar mistake. It took me a few years and countless tuition fees before I learned the damage this style of trading did. Now, whenever I am confronted with apparent adversity, I know that my judgment may be affected. In this case, the most sensible thing to do is to immediately close the unsatisfactory position, temporarily stop trading for a few minutes, and reassess the current market conditions. Holding on to losing positions or continuing to increase, hoping that the market will cooperate with your ideas, this approach may occasionally succeed, but it is entirely dependent on luck. However, can trading rely on luck? Traders must continue to act wisely. Acknowledging the loss and starting over is a wise move. Overtrading doesn't work.
More aggressive short-term entry and exit
After a loss, some traders will suddenly change their style: they will not expand the size of the position, but start short-term speculation, hoping to recover the loss bit by bit. They don't want to let the position take risks because they are afraid, so as long as there is a profit, they will close it immediately, and they will not let the position have the opportunity to create a major profit. Assuming an initial loss of $1,000, they figured that 10 trades would recover the previous loss if they made a profit of $100 per trade. This kind of fund management strategy of small wins and big losses seems unreasonable. If you are not used to short-term speculation, you should not let your existing profits and losses change your trading habits. If you can successfully make 10 short-term trades, why not just trade them all?
If the position you established can quickly enter the profit-making state, but immediately take the profit, this is tantamount to poaching your own corner. From a long-term point of view, a normal losing trade is nothing special at all. There's really no point in taking 10 trades you're not familiar with just to recover previous losses, and taking profits too early is a bad habit. If you really want to speculate short-term, that's fine, but you must develop this trading style, and you must develop the habit of immediately admitting losses, and you must also ensure that the commission fee must be very low. Some short-term traders are indeed very successful. They not only accept small profits, but also control losses to an even smaller extent. They can't stand losses at all, they always take their losses immediately, and they don't let the losses develop enough to affect their trading style.
face saving deal
No one likes to lose money. Some people think that losing money is something that loses face. If you lose money on a trade, admit defeat and move on. Whenever a trader has the psychology of confronting the market, it is actually to protect his own face. Face is a very difficult issue, whether in financial transactions or in real life, face often makes people do things that should not be done. Therefore, if a trader overinflates his ego, it can have a negative impact on trading. If trading is regarded as a means of maintaining face, irrational behavior will appear, and excessive trading is likely. As long as the transaction fails, you should admit your loss and forget about everything. Every new trade should be in the mindset of starting from scratch, regardless of whether previous trades succeeded or failed. Don't care about any harm caused to you by the previous market development, just let the past pass. It is important to remember that losses are an inevitable part of trading. You must get used to losing money, but you must keep the loss within a reasonable level. The result of a transaction is not worth worrying about at all. If you can't stand losing money, you probably shouldn't be trading. Don't beat your chest, don't blame others, loss is just a normal cost of trading, don't let loss affect future transactions.
If a trader keeps losing money in a certain market, it is best not to have a face problem or thoughts of revenge. For example, if you always make money in crude oil but lose money in pork, try to trade in crude oil and out of pork. However, sometimes face issues arise and you may stay in the pork market because you want to prove that you can beat it. In this case, it is very likely to overtrade, because the continuous accumulation of losses will force you to trade more aggressively, otherwise you will not be able to recover the losses. In order to recover the previous losses, you may not only overtrade the pork market, but you may also drag other markets because you will not be able to make money in the pork market at all. I discovered long ago that I couldn't make money in the silver and gold markets. I don't know what the reason is, but about 80% of the trades in these markets lose money. In the end, I finally gave up, so I haven't been in these markets for many years. Admitting that his operating strategy is not suitable for the precious metals market, he stepped down and bowed very humbly, announcing gold and silver as the winners. Now, I don't think about this market at all. Even if there is a big market for gold, it will not complain. It's not a market I intend to trade in, so I don't really care. In fact, I probably saved a lot of money by concentrating on the markets I was better at.
self-aggrandizement
During the period of continuous profit, you also need to be careful not to over-trade because of this. Fear and greed are two of the most obvious emotions associated with trading. When you lose money, you become fearful; when you are lucky, you become greedy. When some people first start trading, their performance is not bad. But it doesn't take long for the ego to be inflated by the smooth trade. They think that they are invincible and invincible, and there seems to be nothing impossible. They even believe that they have the ability to turn gold into gold, so they should be more active in trading, so as not to waste their talents. When you feel this way, it is best to give up all positions immediately and suspend trading. However, some traders, when they succeed through luck, become aggressive and start increasing the size of their trades, taking positions in other markets, simply because they think everything is going well. So, stop doing the necessary preparations and start doing whatever you want. The luck may continue for a while, but a streak of winning streaks is usually followed by a period of very bad trading, mainly due to overtrading. Remember, financial trading is a game of chance and you are unlikely to have good luck consistently. If you're not careful, when your luck runs out, the first and second losing trades could wipe out most of your previous profits.
Stop loss is set too close
Speaking of emotional issues, I have to bring up another possibility that can lead to overtrading, and that is setting your stops too close. Perhaps based on fear, some traders set their stops very close because they worry that the losses will be too severe. If the stop loss is set within the normal fluctuation range of the market, it will be easily triggered. Since the position where the position is stopped is usually on the edge of normal market fluctuations, after the stop loss is triggered, the trend that the trader originally expected will often start immediately, and the result is obviously very annoying. In this case, if the trader does not want to miss the opportunity, he must re-enter the market. If the stop loss is set too close, the whole process will continue to vicious circle. Therefore, when setting a stop loss, it is important to allow the market room to stretch its arms and legs. If the stop loss is set properly, as long as the position is stopped, you should usually not re-enter the market. If you find yourself getting stopped out a lot, you should probably look for markets that are less volatile, so fear doesn't dictate your stop loss strategy.
Add
