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2023-05-29 • Updated

How to Avoid Overtrading


In Forex, when traders start excessively buying and selling currency while disregarding their strategy, they are ‘overtrading’. Overtrading is dangerous as it often happens when traders get caught up in their emotions and can’t make rational decisions. It is especially dangerous for amateur traders who are yet to learn their limits.

In this article we will talk about the main reasons behind this condition, the signs and dangers of overtrading in Forex and ways to prevent it from happening.

Key Takeaways

  • Overtrading is a mistake traders make when they continue to trade despite reaching their limit, usually after a losing streak.
  • Overtrading is dangerous because traders can amplify their losses and rack up transactional costs, which can potentially blow up their account.
  • Traders can avoid overtrading by creating a strict trading plan, developing a risk management strategy, and not giving in to their emotions.

What is Forex overtrading?

Overtrading generally occurs when Forex traders become distressed after a series of losing trades. They try to compensate for their losses by opening more and more positions, each one bigger in size and volume than the previous one. 

This is done mainly to catch up with their profit targets. But the urge to open as many positions as possible to increase their chances of succeeding makes it harder for traders to make rational decisions, which results in more losing trades.

What are the signs of overtrading?

There are typical signs of overtrading that all traders should be aware of.

  • Opening more trades than usual. Different traders have different trading styles and goals. However, if your standard trading period ends with about 30 closed trades and you find yourself suddenly pushing on 100, then you’re definitely overtrading.
  • Feeling regret. If you close a losing trade and feel regretful for opening it in the first place, then you’re likely to be overtrading and trying to compensate for your previous losses.
  • Fixating on the market movements. You might catch yourself looking at the charts, thinking you see multiple opportunities and itching to try and use them all. But the market doesn’t always move in accordance with our expectations. So even if something seems like a good opportunity, it is very unwise to try and use it without proper research.
  • Straying from your strategy. It is one thing to change your strategy when the market conditions require it. It is another thing to do so just because you want to get more profit. Abandoning your initial plan in favor of spontaneous decisions is one of the biggest mistakes a trader can make.


Dangers of Overtrading

Overtrading is a very dangerous mistake, especially for a novice trader who still hasn’t built a proper trading strategy and plan.

When traders try to trade too many positions at once while keeping an eye on the market, their attention is divided, and they end up missing the right moment to close their trades, which costs them quite a lot of money.

This is especially dangerous for traders who use high leverage, which can exacerbate their losses and even blow up their accounts entirely.

Besides, when you take a lot of trades, you have to pay the spread and commissions. These costs also add up and can even outweigh the potential profit you do manage to get from overtrading.

How to prevent forex overtrading?

Now that we know how dangerous overtrading is, it is time to learn the ways to prevent it from happening.

Prepare a trading plan

The most basic thing you can do to avoid overtrading is devising a trading plan. Without a trading plan, it is impossible to keep yourself in check. It should include some entry and exit rules, the maximum number of trades you can take within a given period, and risk prevention measures. But don’t use profit targets instead of a trading plan, or you’ll be setting yourself up for failure.

Develop a good risk management strategy

No trader can succeed without a proper risk management plan. Risk management includes rules and guidelines that you create to minimize your losses from unsuccessful trades. This can be done by calculating the amount of money you’re comfortable to lose and your risk-reward ratio, setting price targets for your trades, and placing stop and limit orders.

Use trading tools to sort through potential trades

There are many trading tools and programs (for example, moving averages) that can identify the best trades for your current trading strategy. Using them can help you weed out opportunities that aren’t in line with your trading plan and prevent you from losing focus and switching into the overtrading mode.

Take some time off

Many traders start overtrading to compensate for their unsuccessful trades, which only prolongs their losing streak. So if you feel like you’re getting overcome with emotions and can’t think straight, it is better to take a break from trading. In trading, success is cyclical, and after some time you’re bound to get back on track. Stopping at the right time can save you a lot of energy and money.

Don’t try to control the market

A lot of traders mistakenly think that they can control the movement of the market. But this is simply not true. Sometimes, the movement of the market can be predicted, but in most cases it is completely unpredictable. No matter how many trades you open, it doesn’t improve your chances of getting profit. The sooner you accept this simple truth, the easier it will be to avoid overtrading.

Overtrading in Forex: Summary

Overtrading is one of the most common mistakes forex traders make. It occurs because they lack discipline and understanding of how the market really works. To avoid overtrading traders should stay focused on their current trades, have a trading plan in place, and accept that losing is a part of trading.

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