What is Overtrading

When you’re an active trader, it’s a common mistake to think you always need to be in a trade. Trading involves a lot of analysis and a lot of, well, sitting around, patiently waiting! With some trading strategies, you may need to wait a long time to get a reliable signal to enter a trade. Some traders may enter less than three trades per year and still produce outstanding returns.

Check out this quote from trader Jesse Livermore, one of the pioneers of day trading:

Money is made by sitting, not trading

Try to avoid entering a trade just for the sake of it. You don’t always have to be in a trade. In fact, in some market conditions, it’s actually more profitable to do nothing and wait for an opportunity to present itself. This way, you preserve your capital and have it ready to deploy once the good trading opportunities show up again. It’s worth keeping in mind that the opportunities will always come back, you just have to wait for them.

A similar trading mistake is an overemphasis on lower time frames. Analysis done on higher time frames will generally be more reliable than analysis done on lower time frames. As such, low time frames will produce a lot of market noise and may tempt you to enter trades more often. While there are many successful scalpers and short-term profitable traders, trading on lower time frames usually brings a bad risk/reward ratio. As a risky trading strategy, it’s certainly not recommended for beginners.

Was this article helpful?

Related Articles