How to Stop Overthinking in Trading & in Life

Trading psychology

Overthinking refers to a habit of thinking too much up to a certain level where it starts adversely affecting. This habit always adversely affects our life in general and trading in particular. In fact, it is a mental poison that dramatically affects our behavior, thinking, personality, and work life. However, it is often unaddressed and that’s why people don’t think about this serious issue. Overthinking in trading is even more harmful as it leads you to lose your edge and make bad trades. The situation becomes even worse when you are at a loss and the fear of losing more money becomes overwhelming for traders. Is it damage your psychological strength? Yes, it does and that’s why overthinking should be addressed. 

In this article, we are going to explain the causes of overthinking in trading and in life. Additionally, you are going to learn how to stop overthinking and get rid of this negative habit affecting your personality, life, and trading. Let’s begin.

Causes of overthinking in trading and in life

There might be numerous causes that lead people to overthink various aspects of life and trading. The most common reasons are;

1. Streak of losses or losing trades

A streak of losses in life and particularly in trading leads people to overthink. They begin to think too much about their losing trades. This is a habit that makes people make more mistakes. Therefore, never overthink and get overly influenced by your losing trades.

2. Not having trust in the trading plan and strategy

Overthinking also leads people to distrust their trading plan and strategy. In such circumstances, people may add more indicators and look for more information. However, this overthinking doesn’t bring any good and only confuses them. Thus, they make more mistakes and only see their losses piling up. Therefore, it is important to develop a good trading plan and strictly follow it. You can tweak it from time to time and try to make it even better. Not following it or switching from one plan to another only causes more losses.

3. Not keeping emotions at bay

Emotions are an important aspect of human life. No one can avoid emotions. However, it is possible to keep emotions at bay when trading. For example, FOMO (fear of missing out) is an emotional mistake that traders often commit and enter trades at the wrong time. Similarly, the fear of losing money also makes traders miss good trading opportunities. They keep overthinking about it and the opportunity vanishes. Therefore, it is important to keep emotions at bay and start making rational decisions. 

4. Other reasons for overthinking in trading

In this digital era, traders have access to so much information that often becomes overwhelming for them. They begin to overthink it. However, trading according to price action is important because it’s the price action analysis that enables you to enter or exit a trade on time. Therefore, follow price action, charts, and other good indicators instead of looking for overwhelming information. Furthermore, access to more information also makes trades think that they can beat the market. However, they end up losing money after acting over-smart. That said, keep things simple to make money in trading. 

How to stop overthinking in trading? 

Here are a few tips for you to stop overthinking in trading.

1. Trading plan

Developing a well-thought-out and reliable trading plan is the backbone of trading. In addition, it is paramount to stop overthinking in trading. Everything else comes after a good trading plan. Therefore, never distrust or doubt your trading plan. Instead, think of your plan as an instructor and guide that defines the rules you need to follow. It should be your trading plan that needs to set parameters to enter or exit a trade. If it isn’t there in the plan, it is better to not engage with any trade. Moreover, it is always better to make a precise and specific trading plan but it should be comprehensive at the same time. That means it should cover all important trading aspects like entry/exit, risk management, and so on. 

2. Practice discipline and self-control to avoid overthinking

Trading discipline and self-control are the hardest parts of trading. The best tool to implement discipline and self-control in trading is your trading plan and strategy. You can include the timings in your plan that defines when you will be in front of your monitor screen and when you need to leave your desk to stop overthinking in trading. This may seem weird to you. However, it is crucial to avoid sitting in front of charts to avoid overthinking and risking your money with impulsive behavior. 

3. Keep emotions at bay – the key to prevent overthinking

Keeping emotions at bay is paramount to success in trading. You need to develop a comprehensive trading plan and strictly follow it to avoid making emotional decisions. For example, when defining factors like position sizing, stop-loss, risk per trade, etc., you can eliminate the fear of losing money. That means you need to control aspects of trading you can control. Trading is a risky arena and you should be prepared for losses. So, you can keep emotions at bay by considering various aspects of trading.

4. Hold winning trades while cutting short your losses in case of losing trades

Don’t behave like traders who hold losing trades but cut winning trades early. Holding losing trades piles up your losses. Whereas, cutting winning trades because of fear of losses cuts your profit short. However, successful traders don’t do it. Instead, they do the opposite. They cut losing trades to minimize losses while holding winning trades to maximize gains. Therefore, always follow profitable traders and maximize the odds of success. 

The wrap-up

Overthinking in trading is injurious to trading that seriously hurts your trading performance. There are multiple causes of overthinking. You need to identify those causes and try to stop overthinking to perform better in trading. Always remember that a well-thought-out trading plan is your best friend in trading. You need to have confidence in your trading plan to stop overthinking in trading. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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