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Over-trading occurs when a person places too many trades on the market. Over-trading is psychological and it is a risk, particularly on quiet days and particularly for aggressive traders. It is important to have methods in place to help you avoid over-trading by understanding your triggers.
Take a Break After Experiencing a Big Loss
The definition of a big loss is relative to the individual trader and you need to have enough personal insight to know how much loss will have an impact on you. Whatever the amount of loss that will cause you stress, you need to take a break if you reach that level. Whether you realize it or not, you risk over-trading in this scenario in an effort to try to chase your losses and make back some of the money you lost. Even more significantly, because big losses can happen quickly, you will be tempted to try to make the money back quickly. Rather take a break and let your emotions settle down before you trade again.
Set a Maximum Number of Trades Per Day
It is easy to justify each trade in real time as you place it. Because of this, you need to be sure to place a limit on the number of trades you will place on any given day and even more importantly, stick to your limit.
Set Profit and Losses Limits Per Day
In the same way as you need to limit your number of trades per day, you also need to limit your profits and losses for any given day. Analyze your trading results for a minimum of the last three months and use this historical data to set your limits. Setting goals and loss limits will allow you to accumulate your wealth over a period of time, instead of aiming to make as much as possible in as short a time frame as possible. The latter rarely works and more often results in bigger losses.
Limit the Time You Spend Trading
Trading is not like a 9 to 5 job where you are expected to be working for all those hours straight. With trading, you set price alerts and analyze markets looking for triggers, but you do not need to be in front of your screen for the entire day to be successful. In fact, often, being in front of your screen the whole day will lose you more money. Set aside a few hours for trading and then take a break and do other things.
Have a Trading Plan
One of the best ways to avoid over-trading, is to have a trading plan that you stick to. This will help you know when to trade and will help you avoid pouncing on trades that are not in your best interest. If you don’t have a trading plan, sit down and spend the time making one. You will need to put in extra time at the beginning until you have perfected it, but it will save you time in the long run.