Risk management is an essential part of any trader or investor. Refers to a situation where traders take measures to prevent downside while working to maximize returns.
There are many risk management strategies on the market, including:
- Get a stop loss
- Check order sizes
- Avoid over trading
In this article, we will focus on over-trading, its risks and Why do you have to exaggerate sometimes.
What is overtrading?
Hypertrading, as the name suggests, is a process Open many deals in one trading session. there No exact number One of the daily deals that are characterized by excessive trading.
For some people in particular Swing TradersAnd Opening at least Ten trades a day can be considered excessive trading.
For other traders, especially speculators, it is not uncommon for them to open more than 50 trades per day. In most cases, the optimal number of trades one should make per day should be less than 20.
Why is over trading risky?
As mentioned, one of the best ways to prevent or Reduce risk In the market Avoid over trading. There are many reasons why excessive trading is very risky.
lack of research
Firstly, when you over-trade, there is a possibility that you may do so Don’t do much research for all your deals. This is dangerous because you will open your trades blindly.
As we have often had the chance to say, trading is very much based on analysis (not prediction).
Information overload
Second, over-trading can be tiring and lead to fatigue. This happens when you do Lots of analytics on businesses or other assets on a given day. In most cases, this will involve reading multiple news reports, analyst reports, and performing technical analysis.
Moreover, managing hundreds of trades a day can be challenging, Especially when the markets are volatile. It is because the number of news events in the market can be very high, which makes it difficult.
expenses
other risk He is related to trading fees. The benefit of trading stocks in the US is that many brokers have removed fees in an effort to compete with the likes of Robinhood and WeBull.
However, if you are trading in other markets like forex and options, there is a big risk of spending a lot of money in trading fees.
What causes over-trading?
There are several reasons why this is an exaggeration. First they are Exaggeration due to their overall strategy. For example, Brokers Earn money by unlock scores of deals Per day and then Take a small profit in all of them. Therefore, they exaggerate as part of their overall strategy.
Secondly, traders over-trade because of greed. This happens when a trader has a good winning streak and then assumes that more trades will be profitable.
Moreover, traders open many deals per day because of fear, especially when they lose money. The hope is that opening more trades will lead to more profits and help them recover their losses.
Finally, many new traders exaggerate because of their enthusiasm about the market. This is when they start trading and assume that they will always make money.
Related “ The overconfidence bias explained
When should you over-trade?
While over-trading is risky, there are certain times when it makes sense to open more positions than usual. Some of these periods are:
When the market is volatile
While volatility is usually risky for most traders, the fact is that Many merchantsEspecially the speculators You find an ideato. This is because this volatility makes it possible for you to enter trades and close them within a few minutes with a profit.
when the market is trending
Another time you should consider over-trading is when the market is trending up or down. Such situations allow traders to open positions and then follow the trends.
For example, if the market is going up sharply, you can open many trades according to the trend and make money.
When your strategy allows
Occasionally, Your trading strategy can allow you to overdo it. A good example of this is your use of a strategy such as arbitrage or pair trading.
This strategy involves Buying and selling of related assets. The goal is to make money from the overall spread that appears.
How to exaggerate well
Although we do not recommend overtrading, there are many strategies that will help you overdo it well. Some of these methods are:
Do the appropriate analysis
Regardless of your strategy, always make sure that you do the proper analysis of your trades. This is where you make sure that you do enough analysis before you open a trade.
In other words, always make sure you are You have a reason or trigger To enter into a trade, not just predict.
Always protect your trades
When opening many trades per day, always make sure to protect them. Fortunately, there is Tools that help traders protect their trades.
Most companies provide stop loss and take profit. A stop loss automatically stops the trade when it reaches a certain level.
Trade volumes
Since we do not recommend excessive trading, we always suggest that you do so Use small commercial volumes To reduce your exposure and harmful instincts.
The goal is to make sure you don’t lose a lot of money, which is possible when you open a lot of trades in one day.
Learn about the links
The other important thing you need to know when you start over trading stock link. In most periods, firms in the same industry tend to move in the same direction. Therefore, you must make sure that you know about this.
For example, if you open long positions on stocks like Apple and Microsoft, chances are you will make money when the stock goes up. If technology stocks drop, there are chances that your trades will incur a loss as well.
summary
In this article, we have looked at the concept of over-trading and why you should avoid it. We have also looked at the risks of this practice and When you should open several deals on a certain day. In general, we recommend opening a few trades per day rather than hundreds.