Overtrading is a common issue for investors, whether amateurs or professionals. Overtrading refers to the issuance of more orders than necessary, and it may be harmful to many people that trade certain assets such as CFDs (Contracts for Difference). A CFD allows people to speculate on the movement of an asset without actually owning the underlying asset itself. It is similar to an insurance contract since both involve risk-sharing agreements between two or more parties (the buyer and the seller). The difference is that under a CFD agreement, one party would need to pay for losses made by another party instead of having them shoulder all the risks. You can trade CFDs with Saxo Bank.
Overtrading may lead to more significant losses than necessary. It can happen when too many trade orders are placed at once or when market conditions change too fast. Overtrading may also occur among beginner traders who place lots of buy/sell orders, even though they have no idea about how the market works.
Choose a trading strategy
Overtrading is a significant problem in CFDs because it may lead to traders incurring more losses than necessary. You can prevent it by defining what strategy best suits your needs and then executing trades accordingly. For example, suppose you want to invest long-term in the Australian share market using CFDs. In that case, you should choose an asset with high volatility (for example, Apple stocks) instead of low volatility assets like Fairfax Media. The reason behind this is that high volatile assets will allow for more significant profits when trading becomes effective again after price movements decrease substantially (technical analysis suggests that this will eventually happen).
Monitor trading results closely
One cause of overtrading is the lack of information. You do not know how the market has been doing for the past few days, and you may make multiple trade orders because of this lack of knowledge. That is why it would be best to closely monitor trading results so you can make better judgments on when to make trade orders or when to stop trading altogether. The easiest way to monitor your results is through automated trading systems connected to the stock market network 24/7. It ensures that you get live prices at all times, allowing you to monitor your trades more easily without having to watch charts every few minutes.
Keep a certain amount of money ready
Another cause of overtrading may be traders’ desire for excitement, especially among beginners. If you are a beginner, you should start trading with low funds at first so that you will not have the urge to trade more than necessary just because you can afford to lose money. You should only invest more significant amounts once you have become experienced enough to choose good trade opportunities instead of focusing on how much money you are putting at risk.
Use fixed stop-loss levels
Overtrading due to ignorance may also occur if traders do not use proper risk management techniques. One effective way of managing your risk is by using a “stop-loss” order, which acts as an automated exit system in case significant losses occur when trading CFDs. When creating such orders, ensure that they are placed before any trade orders are placed. You should set stop-loss orders at five pips (or 5 points) below/above entry prices, allowing traders to make more room for manoeuvrability. However, use this with care, especially during periods of high volatility or when breaking news has been released regarding the asset you are trading in.
Write down your goals and act accordingly
Overtrading may also occur because traders lack a concrete goal in mind. For example, they may have the goal of being profitable in one month but do not have a clear idea of how to accomplish it. To trade effectively, you need a clear understanding of what you want from trading CFDs. It would be best to have a short-term, medium-term, and long-term goal you want to achieve. You should then set yourself up with a plan of action to monitor your progress towards achieving these goals.