Sunday, April 4, 2010

What does overtrading really mean?

I am sure you readers are familiar with the term "overtrading". It is one of the most common mistakes traders make, especially in ranging markets. Yours truly has been guilty of the same too during recent times. So, I decided to write a post on what overtrading really means and to remove some popular misconceptions about it.

The easiest way to define overtrading is by describing what it is not. Overtrading is NOT making more trades than you would normally do. Overtrading cannot and should not be defined just by the number of trades made. Why is that? There will be days where your system or the tape will give you many trading opportunities. Then you owe it to yourself to take advantage of these opportunities and enter these setups. Say, you normally enter around two positions a day but on this particular day, ten stocks trigger your buy point and you enter all these positions. This is not overtrading. This is simply doing the right thing.

Overtrading is entering into trades even when your system (can be mechanical or discretionary) does not even issue a buy signal. It is trying too hard to make things happen, rather than waiting for things to come to you. This might be due to boredom, frustration or other similar reasons. So, if on a certain day, your system does not issue any buy signal, and you still buy a stock hoping for the best, that IS overtrading. 
In the first case, using the same trading system, entering ten positions on a given day is not overtrading but in the second case, entering just one position is overtrading.

Hope this post helped define what is overtrading and perhaps more importantly, what is not overtrading. Take care and good luck!

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