OUR FAVORITE IS THE LAST POINT WHICH IS ALSO THE BONUS POINT
A simple understanding of overtrading is the amount of stock trading one does which exceeds over and above its finance allows. It is basically the cash position of the trader and the risk the traders take to generate certain returns. Insufficient cash resources occur when the trader takes a position which the becomes unmanageable once they go in the wrong direction.
With the increase in the quantum of trading leads to increase in the size of the open position and more important drastic reduction in a margin of safety. This makes the traders uncomfortable when the volatility increases and very often leads to wrong and premature decisions.
Especially Spam Margin only trading accounts have a higher risk of over-trading since their limits are already high when compared to regular margin.
Even the Beta Neutral Stock Trading strategies are not insulated from the disadvantages from over trading. Beta Neutral trading strategies are more historical in nature and are not that good in forecasting.
REASON OF OVERTRADING
Continuous Trading Profits
Especially new traders when they take their first few trading profit this raises their confidence level and tend to look at every stock as a trading opportunity. Profit raise their level of confidence which results in increased activity which is otherwise over trading.
Intense desire to get the alpha return and beat alpha returns leads to overtrading. The desire to beat the alpha returns takes a toll on decision making. Greed is the cause and result is wrong decisions. Trading greed not only makes your ignorant but affects your trading judgment.
High expectations this is very tricky. This has nothing to do with greed. Greed makes a person want more and more irrespectively. But the expectation is based out of some premises. Some top trading would be making a 300% returns on his trading account. For example trading account with high margin limits and over trading can lead to high returns and it forces you to believe that it is achievable. Failing to understand the right reason behind such a performances.
“Too much of a good thing can be wonderful!”
― Mae West
Higher expectations lead to justification of trading activities. You would not be satisfied with reasonable trading results. And this would lead you to make more trades when there is no opportunity.
This is the most important point. Cheap loans is a sweet poison. It makes you feel that you can easily get a good return and repay the loan with the profit alone. This is something which is very rare. Those who take a loan to trade are playing with the knife. Especially when they hold on to the loss-making stock or strategy they are catching a falling knife.
Now cheaper loan is a phenomenon it makes you comfortable to cover up your losses with another cheap loan and the endless cycle start which is a never ending. Until and unless you stop getting cheap loans.
If your stock broker is giving you tips to trade this is the most likely thing to happen since the earning for brokers come from a high activity.
Revenge! Revenge! The stock market has taken my money and now I am going to trade in such a way to get all my money back which I have lost in the stock market. The stock market does not place to take revenge if at all you want to take revenge you should take it with yourself. Nevertheless, this emotional phenomenon happens unknowingly.
Another main reason what leads to overtrading is a lack of opportunity. Lack of right trading opportunity based on your own trading setup leads to impatience which makes you trade which does not confirm your own trading setup.
SIGNS OF OVERTRADING
Sticky to Computer
This is the most important aspect of judging if you are over trading. Are you not able to leave your trading terminal and sticking to it all the time thinking what is going to happen next? You are definitely overtrading.
The reason behind this is more than curiosity and less the fear. Usually, only full-time traders who have a portfolio of stock trading and take a huge position in the stock market which is a tiny part of their entire investment in the stock market stick to the system most of the time. They stick to the system to make adjustments not out of curiosity. Even they give gap while trading is going on which people who are over trading do not.
If you are confident that you are not overtrading even after you are sticky to the system all the time. Then next most important aspect is that are your nights restless. If yes then are your worrying about your positions if the answer is yes then you are over trading.
Unable to Maintain your Stop losses
At Alphatrading we are continuously saying that never move the stop-loss in the opposite direction of the target. Once you have entered your trade in the trading terminal whatever may be your setup or system ensure that your stop-loss does not change. Many people change their stop-loss only when the current position is going in loss. Not when the current position is going in profit.
If you are not able to maintain your stop-loss for the reason of making a loss then you have already made one. But if you keep extending your stop-loss then there is a performance pressure on you which is not allowing you to change the stop-loss.
RESULTS OF OVERTRADING
Risk management goes for a toss. When greed takes over you at that point of time you would be under the impression at least any one of the trade would go successfully. And this is not the way the trading strategies work. Neither probability trading nor beta neutral strategy can manage risk aptly. Over exposure and over trading only leads to higher risk.
Changing Stoploss Very Often
You would tend to change your stop-loss very frequently because there are other positions which are in profit and that would save even the loss making position to profit. Not able to handle loss and avoiding a loss for some more time just to take a chance to increase the probability to cover up the loss at least and finally you end up making, even more, losses in overall position.
Changing strategy very often or trading multiple strategies with a large position to overcome the current loss in a portfolio.
SOLUTIONS OF OVERTRADING
1. Include the aspect of Overtrading while creating a strategy for implementation.
2. Follow the strategy blindfolding. If you cannot follow the strategy blindfolding then do not implement the strategy rather paper trade the strategy till you gain confidence.
3. Make sure that your strategy can withstand 10 continuous losses.
4. The strategy should not make you look at the screen all the time.
5. Maintain strict stop-loss as per your trading system and follow the same.
6. Do not take a cheap loan for trading.
7. Do not misuse Margin Leverage.
“If it’s worth doing, it’s worth overdoing.”
― Ayn Rand
Overdoing to be successful is very important but doing in the right way is even more important.
Please Note Over Trading should not be confused with HFT or Black Box Trading. These are different concepts altogether. The premises of trading in High-Frequency Trade (HFT) is much different from over trading. HFT can also be over traded.
Go and do a complete audit of your Trading System using the above points.
Know someone who is OverTrading. Share this guide with them to help them avoid Over Trading Blunders.
Also published on Medium.