Overtrading – Causes, Types & How to Avoid It

Contributor Image
Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Overtrading occurs when traders or investors buy and sell financial instruments more frequently than their strategy or financial situation warrants.

It often leads to diminished returns and increased risks.

Moreover, it often leads to increased costs (commissions, fees, etc.).

Understanding the causes, recognizing the types, and employing strategies to avoid overtrading are important for maintaining a healthy portfolio.


Key Takeaways – Overtrading

  • Causes – Overtrading is caused by psychological triggers like greed, FOMO, and overconfidence, as well as strategic issues like excessive leverage and lack of a trading plan.
  • Types – Types of overtrading include scalping, news-based trading, gambling mentality, volume-based, leverage-based, overtrading in size, and emotional overtrading.
  • How to Avoid Overtrading – Avoiding overtrading involves having a strong trading plan, strong risk management, setting boundaries, self-reflection, cultivating emotional discipline, and seeking guidance if needed.
  • The best traders don’t typically look at things as just a series of independent trades.
  • They usually have structure and balance to their portfolio and are usually looking for sources of alpha that can last a decade or more, rather than fleeting one-off opportunities that don’t really give them anything long-term.


Causes of Overtrading

Understanding the causes of overtrading is the first step in guarding against the detrimental impact of overtrading on one’s portfolio.

Psychological Triggers

  • Greed and the Quick Profit Allure – Interest in rapid gains can seduce traders into making impulsive decisions, veering off a realistic strategic course.
  • Fear of Missing Out (FOMO) – Observing others capturing gains or reacting to market fluctuations can ignite a rushed and often reckless pursuit of similar successes.
  • Revenge Trading – In an attempt to recoup losses, traders might engage in riskier bets (e.g., Martingale). This compounds their financial jeopardy.
  • Boredom and the Thrill of Trading – For some, the excitement of market participation or sheer ennui can lead to unnecessary, speculative trades.
  • Overconfidence – An inflated belief in one’s trading acumen may encourage taking undue risks.
  • Emotional Trading – Decisions driven by feelings – whether greed, fear, or a desire for revenge – tend to result in hasty, ill-considered trades.

Strategic Missteps

  • Excessive LeverageLeverage amplifies both potential returns and losses. It tempts traders to overextend in hopes of magnifying their gains. Any portfolio success (or deposits to the account) can also extend leverage allowance, and exacerbate risk-taking through leverage.
  • Lack of a Clear Strategy – Trading without a comprehensive plan or clear rules can lead to erratic trading behaviors, driven more by market noise than reasoned analysis.
  • Absence of a Trading Plan – The lack of a well-defined strategy means traders may enter the market haphazardly. This can increase the likelihood of overtrading.


Types of Overtrading

Overtrading comes in several distinct forms, each with unique triggers and consequences that can compromise a trader’s portfolio.

Whether driven by a quest for quick profits or emotional impulses, understanding these types can help traders develop safeguards against the temptations of overtrading.

Common Forms of Overtrading

  • Scalping – A subset of day trading, scalping involves making numerous trades looking for small profits from minor price movements. It’s a high-volume, high-risk approach that requires constant market monitoring.
    • Higher-frequency trading styles aren’t a form of overtrading on their own, but they can be when there’s no solid evidence that the strategy will work. (Why does something work and what’s its track record?)
  • News-Based Trading – Quick reactions to news events, without thorough analysis, often result in premature or ill-considered trades. The volatility spurred by news can deceive traders into making hasty decisions.
  • Gambling Mentality – Viewing trading as a form of gambling rather than a disciplined trading strategy leads to risk-taking without proper risk management or strategic planning.

Recognized Types of Overtrading

  • Volume-Based Overtrading – Characterized by executing more trades than one’s strategy or financial plan justifies. Leads to unnecessary transaction costs and random trades. Very likely to diminish returns.
  • Leverage-Induced Overtrading – Involves taking disproportionate risks through non-judicious use of leverage. Tries to magnify gains but also substantially increases the risk of losses.
  • Overtrading in Size – This involves trading with position sizes too large for the account balance. Significantly elevates the risk of major financial setbacks. With concentrated approaches, on balance, your larger right tail often doesn’t compensate for your larger left tail. While the “big thing” is alluring, we encourage smaller position sizing and diversification.
  • Emotional Overtrading – Occurs when traders make decisions based on emotional responses to market movements rather than on a pre-established trading plan or analytical reasoning.



Each of these types of overtrading have unique challenges and risks.

Scalping and news-based trading demand constant vigilance and can lead to burnout and significant financial loss.

A gambling mentality detaches trading from disciplined strategies, making it akin to just pure action – i.e., speculative betting with unpredictable outcomes.

Volume-based, leverage-induced, and emotional overtrading each underline the importance of maintaining discipline – i.e., adhering to a well-thought-out trading plan and managing risk effectively.

Whether it’s resisting the temptation to trade excessively, avoiding outsized positions, or curbing the use of leverage, recognizing these patterns is the first step toward fostering healthier trading habits.


Strategies to Prevent Overtrading

These strategies not only enhance trading performance but also help craft a healthier, more sustainable approach to trading the markets.

Crafting a Strong Trading Plan

  • Establish Clear Goals and Criteria – Construct a detailed trading plan that defines your trading objectives, risk tolerance levels, and specific criteria for entering and exiting trades. Adherence to this plan is important in curbing impulsive trading decisions.
  • Comprehensive Planning – Beyond setting goals, a solid trading plan involves entry/exit rules, risk management protocols, and position sizing guidelines. This roadmap helps keep you disciplined, especially when dealing with the stochastic nature of market volatility. We have example templates of trading plans here.

Embracing Risk Management

  • Effective Position Sizing – Dictate the size of trades relative to your overall capital to ensure no single trade can significantly harm your portfolio.
  • Use of Stop-Loss Orders – These are designed to limit potential losses by automatically exiting a trade at a predetermined price level.
  • Consider Options Options may fit your strategy as far as prudently hedging risk is concerned.
  • Diversify – This principle is less relevant on very short timeframes (position sizing is more important, for example), but not being too dependent on one outcome or return stream is a cornerstone of business.

Related: Order Types

Setting Boundaries

  • Trading Caps – Determine a maximum number of trades for a set period – daily, weekly, or monthly – to prevent excessive trading.
  • Emotional and Physical Breaks – Recognizing the signs of stress or emotional turmoil is important. Taking breaks helps clear your mind and reduces the risk of emotionally-driven trading decisions.
  • Recognize That Variance Is Normal – There’s variance in trading and even the best strategies have downturns (they’re just limited through prudent risk management).

Continuous Self-Reflection

  • Maintain a Trading Journal – A detailed record of all trades, including the rationale and outcomes, allows for reflective learning and identification of overtrading patterns.
  • Regular Review Sessions – Analyze your trading activity and decisions to refine your strategy and improve decision-making processes.

Cultivating Emotional Discipline

  • Emotion Management – Learn to recognize and control emotions such as greed, fear, and “revenge trading,” as these are often precursors to overtrading.
  • Focus on Long-Term Goals – Keep your long-term trading objectives at the forefront of your mind to avoid being swayed by short-term market movements.

Do You Really Need to Trade This?

There are always corners of the market or a “hot” asset that look ripe for some type of trading opportunity.

But is it worth pursuing potential tactical opportunities in something you probably don’t have an edge in?

Seeking External Support

  • Professional Guidance – If overtrading becomes a recurrent issue, consider consulting with a trading coach, mentor, or therapist (with experience working with traders). External guidance can offer valuable insights into psychological triggers and strategies for overcoming them.



Overtrading can be detrimental to a trader’s long-term success, as it often leads to increased stress, diminished focus, and substantial financial losses.

By understanding its causes, recognizing its forms, and implementing preventative strategies, you’ll improve your overall trading performance.