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What does overtrading mean?

Overtrading is a term used to describe a trader who takes too much risk. If you take too much risk, then it becomes close to a certainty that you will lose your capital.

The risk can be taken on in two ways.

The first is that you trade too large a position. Once you take on a position that is risking more than about 2% of your capital, it becomes hard to recover when you run into a string of losses.

The second is that you trade too many positions at once. While the risk on each position may be small, the totality of the risk is too large. So, if they all go bad at once - the equivalent of a series of losses before, you may lose so much capital that you can not recover.

We see overtrading most commonly in small investors, who, because of their small capital, take too much risk even when only taking on the minimum position. For example, a futures trader may decide to take only 2% risk. However, when he does his calculations, he finds that he is only allowed to trade one tenth of a contract. Since one contract is the minimum position, by taking it, he risks 20% of his capital instead of 2% and it is almost certain that he will bomb out sooner rather than later.