Overtrading is the cause of more losses than anything else on wall street. A trader needs to create a sound plan to execute his trades with ease and to have a plan B ready if plan A goes south. Plan B shall not be making hasty decisions and executing trades with no logic or without any setup to cover the previous losses. The average man does not how much capital is required to make a success and he buys or sells more than his appetite to take on the losses in the markets.
It is important to understand the bad decisions taken by a trader that leads to overtrading. The majority of the freshers overtrade to cover their losses out of the feeling of FOMO. This problem directs to a poor understanding of fundamentals when it comes to account handling and capital management. Therefore, they are forced to get out of the market when their capital is nearly exhausted and probably miss opportunities for making profits.
For developing organisations, it is necessary to understand the risk-taking capacity before executing any trade or one may lead to burning their capital. Eventually, one will be forced out of the markets as overtrading will
affect their cash flow and gradually, they will run out of the capital, finding themselves in jeopardy. If the rise in commerce is not professional handled by the experts, it will lead to the organization going bankrupt.
How can you avoid overtrading?
A trading plan is the first step in reducing the danger of overtrading. You need a well-thought-out trading plan regardless of your degree of expertise, the sort of trader you are, or the amount of money you have to invest. You will be able to determine whether you are overtrading once you have the trading plan.
A risk management strategy is required as part of your trading strategy. This includes the rules and practices you put in place to mitigate the effect of making a mistake. In trading, there are multiple forms of risk. Liquidity risk is the danger of not being able to acquire or sell an asset quickly enough to avoid a loss. Market risk is the probability of suffering a loss as a result of changes in market pricing induced by factors such as interest rates and currency rates.
The majority of the overtrades take place with respect to averaging the current positions to cut down their losses, hoping that the market can move 3-4 points up or down depending on the position taken by the trader as averaging helps the trader to reduce the existing difference between the buy/sell price and CMP(current market price), so even a small move can help the trader to close his positions at CTC(cost to cost). For example, if the Infosys Ltd stock is trading at 1750, the trader has bought 1000 shares when Infosys was trading at 1760. He/she is already in loss of 10 points(-Rs10,000). In order to reduce this 10-point difference, the trader tries to average out his position by buying 1000 more shares. Therefore, the average buy price changes to 1755[(1750+1760)/2] from earlier 1760. The majority of the traders average out with the hope that the stock needs to surge only 5 points from existing CMP 1750 so he/she can exit the trader CTC. Due to this, the traders stay deluded with such irrationality and avoid the reality that if the market does not move in their favour, they will end up taking huge losses above their risk appetite and may end up blowing their trading accounts.
Another instance is very common in derivative segments in Indian Markets on the day of the options expiration and this goes with personal experience. In the NSE exchange, weekly options expiration occurs every Thursday. These days is profoundly known for its Hero-Zero calls or Thunder-Blunder calls which the majority of the retail traders execute in the last 2 hours of the market closing time as the volatility increases. On this day an option premium trading at 5-10 can shoot up to 150-200 depending on the volumes and trend in the market. If you are lucky enough to be with trend then you may end up making fortunes out of very little money on this day. There is a saying that what comes easy won’t last long in your life and I can say with conviction that the majority of those traders who have earned money in such a way never end up retaining their capital as they get lured into such trades and at some point,
they end up losing their capital due to overtrading in this segment as they keep on averaging their positions thinking that market will move up in their expected direction and they end up losing the fortunes they had made with such pseudo hope/ expectations. Buying a Banknifty option strike price whose premium is trading at 15-20, if the premium falls, then they would average the trade rather than exiting their existing position. Many retail traders end up blowing their accounts on this day.
Overtrading is the practice of purchasing and selling stocks in excess. It can imply holding an excessive number of open positions or investing a disproportionate amount of money in a single deal.
Overtrading occurs when the restrictions of a trading plan are not followed. Emotions such as fear and greed can also contribute to it.
It is preferable to have a complete trading plan and risk management strategy in place to avoid overtrading.
You may begin trading now that you have a better understanding of the significance of your strategy and trading frequency. Open a live trading account if you’re ready to get started right away, or a risk-free demo account if you want to practice more.