What is overtrading?

Definition of Overtrading and Examples

Overtrading is the excessive trading of securities, such as stocks, to the extent that it harms the trader or violates certain rules. Overtrading can include exceeding a certain number of trades in a defined period, such as if a broker has a limit on how many times a trader can buy and sell the same stock within a few days.

How Does Overtrading Work?

Overtrading can be viewed as a comparison to the concept of overthinking. Generally, thinking is good, while overthinking is usually bad. There is nothing wrong with trading a large number of shares, but when your trading reaches a level that causes losses or violates your broker’s rules, it falls into the risky area of overtrading.

What Does Overtrading Mean for Individual Traders?

In general, traders and investors tend to be poor at timing the market or predicting when prices will rise or fall. Therefore, it might be better to adopt a long-term trading approach: buy an asset and allow the price to rise enough that small price fluctuations do not cause a loss when selling.

You will have fewer fees to pay, and if you wait long enough (a year or more), you may be able to pay lower capital gains taxes instead of having your profits counted as income, which is subject to higher taxes. Patience in trading may lead to greater profits than overthinking and overtrading. Additionally, transaction fees can accumulate for each trade you make, so overtrading can be costly.

If you plan to be an active trader, you should plan to maintain a margin account so that you are not surprised when your broker imposes a pattern day trader rule.

You should look into any rules that may apply at your broker or with specific investments to avoid being subjected to overtrading. Speaking with a financial professional may also help you gain a better understanding of the fine line between trading and overtrading.

For some traders and investors, day trading may align with their trading goals. But for others, overtrading may harm results due to poor market timing, transaction fees, and other expenses.

Be aware that overtrading involves excessive trading, which can negatively impact returns. Some brokers and financial instruments, such as mutual funds, may have their own rules about trading frequency. Frequent trading may incur additional fees and may not be in line with the average investor or trader’s goals.

Source: https://www.thebalancemoney.com/what-is-overtrading-5202056