What is overtrading?
Overtrading is taking more trades than your plan allows, or than your edge supports — trades taken out of boredom, to make back a loss or to “stay in the market”. Each extra trade adds costs and decisions made with less attention, so results tend to get worse as the count grows.
Key points
- Measured against your own plan: more trades than your rules allow.
- Costs grow with every trade; the edge does not.
- A daily trade limit set in advance is the simplest guard.
What the research shows
Even among long-term stock investors, trading more cost money. In a study of 66,465 US households from 1991 to 1996, those who traded most earned 11.4% a year while the market returned 17.9% (Barber & Odean, 2000). Their stock picks were not the problem — the costs and frequency of trading were.
Signs you are overtrading
- You go past the trade limit you set in the morning.
- Trades after the limit do worse than the first ones of the day.
- You trade instruments or timeframes that are not in your plan.
How to limit it
- Set a maximum number of trades per day before the session.
- Stop for the day after a set number of losses.
- Note which trade of the day each entry was — first, second, fifth — and compare results by that number.
Example
A plan allows three trades a day. On a slow day the trader takes seven: the first three follow the plan and make +1.5R, the next four are “filler” entries. Two of them lose 1R each and two more scratch with costs of 0.3R. A +1.5R day ends at −0.8R.
Numbers are illustrative.
Questions
How many trades a day is overtrading?
There is no universal number. Overtrading is measured against your own plan: if the plan says three and you took seven, four were overtrading.
Is overtrading only about the number of trades?
No. Trades outside your setups or instruments are overtrading too, even when the count is low.