Published On: Sun, Dec 23rd, 2012

The dangers of overtrading in CFD Trading

There is a good reason why casinos often provide both losers and winners with complementary services or goods: both groups usually continue to gamble more than the average man or woman.

While professional CFD trading is not even remotely akin to gambling, many novice traders act as if it is. They trade excessively for the very same reason the gambler does. When they lose money they try to recoup their losses; when they make money they get overconfident and start to think that they are “invincible.”

Many novice traders would justify overtrading as “diversifying their portfolios.” Unfortunately, a trader without a clear strategy might only end up multiplying losses if he or she e.g. enters multiple trades in the same industry.

Overtrading can take various forms:

The discretionary overtrader

This trader makes use of non-quantifiable data, such as advice from so-called “experts” or brokers, personal preferences, news reports, intuition or subjective observations to decide on entry and exit points.  These traders just can’t wait for the next trade and usually find a reason to trade, regardless of how flimsy that reason might be.

He or she has no carefully considered position sizes and uses whatever leverage is available. While flexibility can be an asset, this approach more often than not leads to heavy losses.

Technical overtrader

Novice traders often get overexcited when they first encounter technical indicators. They think they have discovered the Holy Grail of trading and enter and exit trades without taking into account all the risk factors. They forget that they might simply have been lucky. A simple example is using moving averages in a trending market: the ‘system’ will work well only as long as the market remains trending; the moment it starts to move sideways it will stop working and the trader who keeps on making multiple trades will incur numerous losses.

The hair-trigger trader

The era of electronic trading has given rise to what is generally referred to as hair-trigger trading. These traders sit in front of their screens and the moment they read about some or other ‘hot tip’ they enter a trade – only to exit it again minutes later when it doesn’t deliver the promised profits.

Such a trader typically has numerous small losses and very few substantial profits since they never give the market time to fully develop its potential before moving on to the next trade.

There are many other types of over-traders, including shotgun trading, bandwagon trading and trading with the Movers and Shakers. They all have one characteristic in common: they simply can’t wait until the conditions for a trade are exactly right: they jump the gun and thereby expose themselves to unnecessary losses.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.