What overtrading is
Overtrading means taking more trades than your plan calls for: entering out of boredom, so as not to "miss" a move, or to rescue the day. Every extra trade costs you twice: fees (spread, commissions) and a lower chance of winning, since the entry no longer meets your criteria.
What studies say
Barber and Odean analyzed the accounts of 66,465 households at a US broker from 1991 to 1996. The 20% who traded the most earned a net return of 11.4% a year, against 17.9% for the market over the same period. Their conclusion is in the study's title: trading is hazardous to your wealth.
The finding holds for active trading too: the higher the frequency, the more fees weigh and the more decisions are made under pressure.
The signs that don't lie
- you take clearly more trades on losing days than on winning days;
- your results get worse from the 3rd or 4th trade of the day;
- you open positions on instruments your plan doesn't mention;
- you struggle to sit through a whole session without trading.
The free diagnostic compares your busy days with your normal days and shows from how many trades per day your results start to slip.
Setting your limit
The right limit is in your numbers. Rank your trades by their order in the day (1st, 2nd, 3rd…) and calculate the average result of each rank. The rank from which the average result turns negative is your natural limit. Many traders find their first two trades make most of their profits.
- A maximum number of trades per day, written in your plan.
- A closed list of instruments: no trade off the list.
- Trading windows: outside them, the platform stays closed.
FAQ
How many trades per day is too many?
There's no universal number. The right threshold is the one from which your average result per trade turns negative; you calculate it from your own history.
Is overtrading emotional?
Often: boredom, fear of missing a move, or the urge to win back a loss. It can also come from a vague plan that doesn't clearly say when not to trade.
How do I stop overtrading?
Write limits before the session (number of trades, instruments, hours) and measure each week what the trades beyond the limit earn.
Sources
- Barber and Odean, "Trading Is Hazardous to Your Wealth", The Journal of Finance, 2000