Overtrading: How To Kill This Bad Habit?

I could tell you the 10 best tips to stop overtrading... But that would be too shallow.

Articles like this don't dig deep enough into the root to solve the problem.

The reason why you overtrade might not be the reason why B overtrades.

95% of the traders share the same 5% of the problems but each trader has different beliefs so they must be addressed differently.

Instead, in this article, I'll present you with methods to help you understand the particular cause(s) behind your overtrading and then, offer you a guide to solve it.

It's important to notice that there are two frameworks in which overtrading can happen:

1. The trader is aware that the trade doesn't fit his/her strategy but can't help himself but taking it;

2. The trader isn't aware that the trade doesn't fit his/her strategy on the entry and only realizes it afterward, during the trade, or when he/she analysis it. This is a problem of awareness or lack of concentration and can be solved more easily.

In this article, I'll refer to the first type which requires a much more profound approach.

Let's begin with...

What's Causing You To Overtrade?

There are many reasons for traders to overtrade. The challenge is in understanding what's yours.

Without knowing your reason, you'll be blind to solving the problem.

To build awareness around your triggers that are leading you to overtrading, I recommend you to have a trading journal that asks you the right questions.

Have a section dedicated to psychology where you can write down your thoughts and emotions on the trades. It must contemplate 3 moments: before the trade/as you take it, during the trade, and after the trade.

Here's the psychology journal I use with the traders I coach:

There are always a lot of conclusions to take at the end of each week!

By writing your mind on paper on every single trade, you'll raise awareness toward the most important aspect of your trading: the decision-making process which happens with the help of an emotion called: confidence

Decision doesn't happen without emotion.

As you collect more data, you'll start to know yourself better, your thoughts and emotional patterns and what are they causing you to do.

In those trades you shouldn't be taking you'll start to realize what was the emotional state connected with it and what was that created this emotional state - your triggers.

There are many triggers to one behavior. This is because all that needs to happen is that the trigger induces the emotional state that leads you to overtrading.

The triggers always happen outside of us and they stimulate us inside.

Here are the 10 most common triggers for overtrading:

1. Nothing to do (boredom)

2. One or more losses (fear)

3. One or more wins (greed)

4. Missing move (fear)

5. Bad sleep (amplifies bad emotions)

6. Bad performance (fear)

7. Micro-managing the trades (fear)

8. Price moving too quickly (excitement)

9. No solid plan (fear, lack of confidence)

10. Lack of preparation (fear, lack of confidence)

I challenge you to add a psychology part to your trading journal or use the model I shared with you and find out what are all your triggers to overtrading. Only after you found them is that you can pass to the next step:

Solving The Problem

After identifying your triggers you need to come up with methods to solve the problem.

These methods can intervene directly - when you're about to take a trade you shouldn't - or indirectly - outside of the emotional state that leads you to overtrading.

The direct method requires a bigger amount of self-awareness and emotional control. But this is the most efficient as you face the exact emotional state leading to your problem pattern.

The indirect methods are used outside of the emotional state of overtrading. If you're not executing them, you'll most likely not be able to execute the direct method.

Direct method

With this method, you create pattern interruptions when you recognize the conditions that lead you to make these trades - your triggers - or the emotional state/thinking process that happens just before you make the “mistake” (you know it because of your journal).

A pattern interruption can be as simple as getting up and going for a 2-minute walk around your office or writing your thoughts in your journal.

There's no better pattern interruption than another. You need to find one that's simple and easy for you to execute consistently, every time you're exposed to the same triggers.

Your pattern interruption activity or set of activities depends a lot on the cause of your overtrading problem.

Say your trigger is having too much time alone at home which leads to boredom. Here, a good breaker would be something that kills this boredom so you don't look to kill it on the charts! A 10min walk outside the home would be a good idea, or a strong physical exercise to take you out of the boredom state.

Now, if your trigger tends to be a losing streak leading you to impatience (of making the money back), then you can execute a pattern interruption that brings you patience - the opposite state of mind. This can be a meditation session on the desk, a walk...

It's important to know your triggers for bad emotional states but also the ones for your good emotional states. This way, you can use them as pattern interruptions - breakers.

Indirect methods

These, as I referred previously, are crucial. You need to get these activities right first and only then you can work efficiently with the direct method.

Here are the most important indirect methods to help you stop overtrading:

1) Prepare your trading weeks

If your overtrading stems from a lack of confidence in your strategy, maybe you should backtest more.

If it stems from a lack of confidence in yourself and what to do while trading, maybe you didn't plan your week as you should. Or maybe your plan is not precise enough!

If you want to trade confidently, you need to be prepared for any market move. This way, nothing will surprise you. You'll be sure of what to do and when to do it.

2) Look at the chart for seconds

If your overtrading comes from watching your trades candle by candle and jumping to lower time frames then you should work on your screen time.

All you need to do is enter the trade, set your stop loss and take profit, and then, to manage your trade, open the chart from time to time, give it a glance and decide if you need to do something. If you don't need to, get out of the screen immediately.

Watching the trade for seconds instead of long periods of time helps you develop your sit-out power.

3) Give yourself a daily or weekly limit

Set a rule to how many trades to take in a day or a week, depending on the type of trader you are. This will help you be picky with your setups.

4) Review your trading plan before starting to trade

Adopt a pre-market ritual that incorporates this activity! It's never too much to remind yourself of your strategy!

5) Make a trade checklist

Before you enter any trade, make a checklist of the confluences of your strategy and go over them. You'll be highly aware if the trade is good or not to take. It also puts a breaker on your temptation to overtrade.

6) Remind of your purpose

Ask yourself before each trade: Do I want to become a trader because I want to trade or because I want to make money?

In your pre-market routine, go over your goals and points of improvement.

If you already do all of these things but your overtrading problem persists then you need to a work at a deeper level. Beyond all the causes I outline in this article there are still the beliefs and past experiences of each individual to take into account. I've been coaching traders to help them get rid of these types of problems with the Trading Psychology Program. With personalized help, you'll drastically improve your performance in a short-term period (if you do the work).

Put it into practice!

Now I have a challenge for you.

One direct technique to combat overtrading is to have a conversation with yourself.

Transform your strategy's confluences into good questions and try to answer them before taking any trade.

What is the market doing? Are we in an upward trend, downtrend, are we in a range? Is there heavy volume going on in the market? Is this a light volume day? Did the moving averages cross? Did the market structure already break?

You know the answers to these questions. The problem is that many times, you don't take the conscious time to answer them clearly and you let your bad emotions take over your decisions.

By answering them, you'll light awareness around another type of emotion: confidence!

And confidence is what allows you to make smart trading decisions.

Try it for yourself and feel free to send me the feedback ;)

Sara

Kill your trading bad habits, learn to handle your emotions, and trade flawlessly.

If you want to enroll in the Trading Psychology Program for September, click here to fill out the qualification form. I open 3 spots per month.