How to Stop or Avoid Overtrading in the Stock Market

 

Obsession or addiction to anything is not good for your health as well as for your wealth. Trading is one of the habits many traders do excessively spoiling their overall returns. This is called overtrading which is not good from any perspective, as you can’t make a profit on every trade, and it is also not possible for anyone to earn a profit on every trade every day.

If you are also one of those traders, sit daily on your computer screen or smartphone dying to trade even though the market condition is not favourable for the traders. Then, I think this article is meant for you, yes today we are going to discuss about overtrading, its symptoms, causes, disadvantages and how you can stop or control overtrading.

What is Overtrading?

In the stock market, overtrading refers to too much buying and selling of stocks by any individual person. Stock overtrading also encompasses excessive buying and selling of any underlying security on a daily or regular basis, that is also called churning.

Also Read: What to Know Before Investing in Stocks: 10 Things to Consider

In overtrading, traders have too many open positions in multiple underlying securities, they use to trade without any planning and right strategy. This kind of unusual trading practice in the stock market is called the over-trading. Though there are no such rules or regulations for overtrading, hence it is also sometimes difficult to differentiate overtrading from undertrading.

Overtrading and Undertrading

Undertrading is the complete opposite of overtrading. When there is a negligible number of trading activities or you rarely buy or sell the stocks and miss the profitable trading opportunities in the market. When you don’t use your money for trading for many days, holding only a few small positions or not buying and selling the stocks it is considered under-trading.

The reasons behind the undertaking could be anything from the fear of losing money to a lack of sufficient funds, unavailability of resources or lack of time to be involved in trading activities. Individuals who don’t have technical knowledge or trading or don’t have the right trading strategy ready as per the market conditions could be other reasons behind the trading.

On the other hand, as we have already discussed if you don’t do excessive buying and selling activities on a daily or regular basis it is known as overtrading. Sometimes market conditions are not favourable for the traders, in such conditions, you should avoid trading. But if you still do that, it could be a sign of overtrading, let’s find the other symptoms of overtrading.

Symptoms or Signs of Overtrading

As there are no rules and laws to curb overtrading activities in the financial markets, hence identifying the symptoms of overtrading is very important to stop the traders from losing their hard-earned money in trading. Here below you can find signs of overtrading.

Frequent Short-term Trades: If you are trading frequently for a short period with short-term trading practice, it could be a sign of overtrading. An unnecessary number of trades without the right timing to generate profits are a clear symptom of overtrading.

Also Read: Short-Term Trading Strategies that Work in the Stock Market

High Trading Volume: When there is a high volume of trades generated by an individual trader, it means, he is doing the overtrading. However, if it is done sometimes it is not overtrading, but on a regular basis with the motive to generate profits then it is overtrading.

Trade in Unfavorable Market: When you trade or buy or sell even though the market condition is not favourable for you, like there is too much volatility in the market or uncertainty and you are still trading it means you are addicted to over-trading.

Also Read: How to Trade in High Volatile Market: Best Trading Strategies

Incurring Loses in Trades: When you are incurring losses in most of the trade positions, it means you take quick trading decisions in buying and selling of stocks. Though incurring losses is not necessarily a sign of overtrading, but it happens in too many trades.

Reduction of Capital or Funds: When your capital is reducing, it means you are losing your funds due to overtrading. Excessive trading does not give the guarantee of earning profits every time you trade, instead, you will lose money resulting in your capital loss.

Also Read: What is Profit Booking in Stock Market: Rules & Best Strategy

Trading Without Strategy: Traders who trade without the right strategy usually makes quick decisions to do frequent trades is also a sign of overtrading. To trade with a strategy you need time to perform the technical analysis and find the suitable stocks and best buying or selling levels. There could be many causes, they trade without a strategy and do overtrading.

Causes of Overtrading

The causes of overtrading cannot be specific and can differ from trader to trader, depending on his personal obsession with the profession or addiction to trade in various financial instruments. However, there is an emotional factor that encourages the traders involved in such overtrading activities. However, there are a few more reasons and some of them are listed below.

Becoming Greedy: In the temptation of earning more profits, traders keep trading and indulge in overtrading activities. Becoming greedy in trading is a natural phenomenon, that most traders can’t avoid even if they earn hefty profits in a single day.

In Over-excitement: When there is a sudden movement in the market or in the individual stocks, the traders jump into the trades. Over-excitement can occur anytime maybe there is some kind of news in the stock, technical breakouts or sudden fall in the stock price etc.

Also Read: What is Breakout & Breakdown How to Identify Breakout in Stocks

Obsession of Trading: Many traders are addicted to trading, which means they have an obsession with trading every day on a regular basis. Just like the craving for drinking or smoking, some people are obsessed with trading, which pushes them into the swamp of overtrading.

To Compensate the Loses: Traders do not even time make profits, sometimes they incur losses, and to recover such losses, they keep trading which makes them involved in overtrading activities. You cannot compensate for the loss from trading unless you trade with the right strategy.

Fear of missing out (FOMO): Few people trade because of fear of missing out (FOMO), as they feel if they not take any trade position they could miss something in the stock market. Traders don’t want to miss any chance; hence they trade on every opportunity causing the overtrading.

Availability of Recourses: This could be the one of biggest reasons behind the overtrading. Yes, owing to the availability of trading resources like user-friendly online trading apps available on smartphones, allowing people to trade at one click with quick fund transfer or buy and sell actions.