Psychology Behind Overtrading: Insights and Solutions

26 Des 2023

As someone actively engaged in the academic study of psychology and conducting ongoing research on trading psychology, I am eager to share my accumulated insights with you. Over the years, my dedicated exploration of this field has equipped me with valuable knowledge. I hope you find the findings presented here beneficial to your understanding of trading psychology


In the first part of trade psychology, let's delve into the concept of overtrading—not in a cliché and colloquial manner, but from a scientific and psychological perspective. After exploring this article, you'll gain a fresh understanding of overtrading.

Following each profitable trade, our minds experience a significant surge of dopamine. Simultaneously, taking substantial risks triggers the release of adrenaline. Dopamine acts as a reward for the brain, providing motivation and energy. With a consistent release of dopamine through trading, our minds start to perceive trading as a source of this neurotransmitter, leading to two consequences:

1. Taking a break from trading induces restlessness.
2. The brain consistently craves more dopamine during trading, whispering, "More... More..."

The brain's responses and behaviors during trading closely resemble those seen in individuals with a gambling addiction. (It's important to clarify that this isn't an equivalence between trading and gambling addiction, but rather an acknowledgment that both activities trigger the brain and its reward system in comparable ways.)

Both winning and losing trades evoke emotions. Every time we lose a trade, emotions such as fear, anxiety, betrayal, and anger arise. Our brain motivates us to keep trading until we experience the pleasure that comes from the reward. Similarly, winning a trade tempts us to seek more, with our inner voice urging, "Give me more."

However, what truly transpires is that our emotions disrupt the structured mindset needed for effective trading. Rules are broken and ignored, and logical excuses are found for actions driven by emotions. Allowing emotions to take charge transforms our actions into something other than trading—call it gambling or whatever you like, but it's not trading.



This is a cycle that traders often experience while overtrading.

I would categorize overtrading as a disorder for traders; it exhibits symptoms, and, of course, there are practical solutions. Four signs indicate a trader suffering from overtrading.



1. Decision-making based on emotions, not thought:

If you find yourself rationalizing or searching for reasons after making a trading decision, it indicates emotions steering the ship instead of a logical thought process. This symptom underscores the impact of emotional decision-making on the quality of your trades.

2. Feeling anxious for extended periods:

Persistent feelings of anxiety, marked by physical symptoms like a consistently high heart rate, dry mouth, and sweating, indicate enduring pressure and stress associated with trading. This symptom emphasizes the need to manage and mitigate anxiety for better decision-making.

3. Instantly opening a trade after a failure (when your stop loss is triggered):

The impulse to immediately jump into a new trade following a failure, such as when a stop loss is triggered, highlights a reactionary behavior driven by emotions like frustration or a desire to recover losses quickly. This symptom points to the potential pitfalls of emotional responses to trading setbacks.

4. Opening too many trades in a day/session:

If, upon reviewing your trading history, you discover an unexpectedly high number of trades in a given day or session, it signals a tendency to overtrade. The content suggests that both wins and losses can trigger emotions, leading to a cycle of continuously opening new trades. This symptom emphasizes the importance of quality over quantity in trading decisions.

26 Des 2023

Catatan

But what should traders do to prevent overtrading?



1. Set maximum trades in a day and week:

Decide the maximum number of trades you'll make each day and week. Stick to these limits to trade more accurately over time, building confidence.

2. Set a trading cooldown:

Take short breaks between trades. Use this time to relax, listen to calming music, and clear your mind. It helps you make better decisions by releasing negative emotions.

3. Stop watching the chart all the time when you open a trade:
Avoid constantly staring at the trading chart. It's a habit that can be harmful, especially if you struggle with overtrading or anxiety. Ease up on chart-watching for better trading.

4. Don't trade when you already have an open position:

Focus on one trade at a time. Don't open new trades until you've closed the existing one. Quality matters more than quantity for successful trading.

5. Write down your rules and place them where you can easily see them while trading:

Make a list of your trading rules. Put them where you can see them while trading. This visual reminder helps you stick to your rules and build good trading habits.

14 Jan 2024

Catatan

Update 1:

It's important to note that while overtrading and gambling addiction may seem distinct, they share commonalities in terms of the psychological processes involved

1. Dopaminergic System Activation:
Trading, like gambling, can activate the brain's reward system, primarily involving the release of dopamine. Dopamine is a neurotransmitter associated with pleasure and reinforcement of rewarding behaviors.
Overtrading may lead to frequent wins and losses, creating a cycle of dopamine release similar to the patterns observed in addiction and gambling.


2. Impulsivity and Compulsion:
Overtraders, similar to those with addiction or gambling disorders, may demonstrate impulsive behavior and a compulsion to trade excessively, driven by an intense desire for financial gains.
Studies have shown that impulsivity is a common trait among individuals with addictive behaviors, including gambling addiction.

3. Cognitive Biases and Irrational Beliefs:
Overtraders, like gamblers, may fall prey to cognitive biases such as the gambler's fallacy (believing that past events influence future outcomes) or the illusion of control (thinking one has more control over outcomes than is realistic)
These cognitive biases contribute to irrational beliefs, a shared characteristic of individuals with gambling and addiction disorders

4. Treatment and Interventions:
Cognitive-behavioral therapies, which have proven effective in treating addiction and gambling disorders, may also be beneficial for individuals struggling with overtrading
Mindfulness techniques and interventions that address impulsivity and irrational thinking patterns can aid in breaking the cycle of overtrading.