The Hidden Dangers of Overtrading and How to Avoid It

Overtrading means taking more trades, or bigger ones, than your trading plan calls for: trades taken out of boredom, to win back a loss, or because the screen is moving. There is no fixed number of trades that defines it. A scalper may place dozens of planned trades a day; a swing trader who places five unplanned ones in a week is overtrading. The test is whether each trade comes from the plan.

Effects of overtrading: what the research found

Brad Barber and Terrance Odean measured the cost of active trading in "Trading Is Hazardous to Your Wealth," published in the Journal of Finance in April 2000 (Barber and Odean, 2000, PDF). It covers 66,465 households with accounts at a large discount broker from 1991 to 1996.

The authors sort the households into five groups by turnover. The fifth that traded most turned over 21.49% of its portfolio a month on average, the fifth that traded least 0.19%: more than a hundred times as much.

The authors note "very little difference in the gross performance of households that trade frequently (with monthly turnover in excess of 8.8 percent)" and those that trade infrequently: before costs, the five groups earned between 18.5% and 18.7% a year. The frequent traders were not worse at picking stocks; they paid more in costs, and costs took the difference. The authors explain the trading by overconfidence: "Our most dramatic empirical evidence supports the view that overconfidence leads to excessive trading." Their summary: "Our central message is that trading is hazardous to your wealth." The study covers U.S. stock investors in the 1990s, with the commissions of the time; cost levels have changed since, but spreads, fees and taxes still scale with the number of trades.

How regulators describe excessive trading

For brokers, excessive trading in a client's account can be a rule violation. FINRA Rule 2111 on suitability includes a "quantitative suitability" obligation: "No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer's account may provide a basis for a finding" of a violation (FINRA Rule 2111). The rule now applies only to recommendations not covered by the SEC's Regulation Best Interest, which has its own care obligation. The same three measures work for a self-directed trader looking at their own account:

• Turnover: how many times a year the value of the account is traded.
• Cost-equity ratio: the year's commissions, spreads and fees divided by the account's equity; the return needed just to pay them.
• In-and-out trading: positions opened and closed quickly with no change in the reason for holding them.

A joint investor bulletin for World Investor Week 2024, from the SEC's investor education office, the CFTC, FINRA, NASAA, NFA and SIPC, warns that apps "might use entertaining, game-like interfaces and stock notifications that can encourage over-trading" (CFTC, World Investor Week 2024 Investor Bulletin).

What costs do to a busy account

The chart runs the same hypothetical costs at one to eight round trips a day.

Four round trips a day is day trading: under FINRA Regulatory Notice 26-10, the $25,000 pattern day trader minimum gave way to intraday margin standards on June 4, 2026, with a phase-in to October 20, 2027; see day trading options.

Cut the trading to one round trip a day with the same costs and the bill falls to $1,250, or 5% of the account.

The trades that are dropped are, if the plan is good, the ones that were outside it. The bid-ask part of that cost is explained in bid and ask, and the win rate needed to cover it in the risk/reward ratio.

Causes and signs of overtrading

Overtrading usually starts from an event, a loss or a move the trader missed, and feeds itself: the urge to act produces an unplanned trade, often larger than usual, whose loss and costs bring the urge back. Barber and Odean trace the excess trading in their sample to overconfidence; the loop below is our summary of the behaviors listed in this section, not a finding of their study.

The signs to look for:

• You take trades that your written plan does not describe, or you cannot say which rule a trade came from.
• You enter again right after a loss, to "make it back," often with a larger size.
• You trade because the market is open, not because a setup appeared.
• Your costs for the month are a large share of your gains, or larger than them.
• You feel restless on days without a trade.

How to avoid overtrading

1. Write the setups you trade, and take only those. The structure is in how to build a trading plan.
2. Set a daily limit on the number of trades and on the loss, and stop when either is hit.
3. Track your costs and compute your own cost-equity ratio each month.
4. Turn off notifications that are not tied to your levels.
5. Keep a journal with the reason for each trade, and review the trades without a reason.
6. Use waiting as a skill. Patience is covered in patience and discipline in trading, and the emotions that push to act in fear and greed and FOMO trading.

More on the mental side of trading is in our trading psychology section.