Overtrading: Definition, examples and how to make sure you don't do it

When managing your own investments, it can be tempting to stay active – especially with real-time data, commission-free trades and nonstop market headlines. But more trading doesn’t always translate to better results. In fact, excessive trading is one of the easiest ways to undermine your long-term investment plan without even realizing it.

What is excessive trading?

Excessive trading – also known as overtrading – can eat away at your returns through higher fees, tax bills and risk. Let’s go deeper.

Definition of overtrading

Overtrading happens when you’re buying and selling investments more often than your finances – or your stress levels – can support. It’s not about the specific number of trades; it’s about whether the activity makes sense for your financial situation.

If you find yourself trading in and out of positions without a clear reason, reacting to headlines or placing trades out of boredom, that might be a sign that you’re overtrading. Selling a stock one day and buying something else the next, repeatedly, might feel exciting, but it doesn’t always move you closer to your financial goals. In fact, it often does the opposite.

The line between being engaged and being overactive can be a thin one, especially now that trading has gotten so easy and accessible. Overtrading usually becomes a problem when it starts costing you more in fees, taxes or missed opportunities than gains.

Examples of overtrading

Overtrading often looks like:

These behaviors may not be illegal, but they can raise red flags for compliance departments – and for your bottom line.

Do brokerage firms have an excessive trading policy?

Broker-dealers typically maintain some form of excessive trading policy and use automated systems to monitor customer activity. These systems will flag unusual patterns and may prompt a review of your account. If your account exhibits any of these kinds of patterns, you might receive a letter from the broker asking you to confirm whether you initiated the trades and understand what you’re doing. If you're using a financial professional, these policies also serve as safeguards to prevent misconduct on your account.

Investing should not be like gambling

When trading starts to feel like a game – or worse, a bet – it’s time to take a step back. Investing isn’t supposed to feel like a trip to the casino, but there has been an uptick in people treating online investing like gambling, so it’s important to be aware of the potential risks. If you're chasing thrills or trying to make quick money to solve a financial gap, that’s a sign to revisit your strategy. Investing is about finding sources of long-term growth, not adrenaline.

Risks of overtrading

More activity doesn’t necessarily generate better returns. Trading too frequently can reduce your returns in ways that are easy to overlook. This might include costs related to commissions, account fees, bid-ask spreads and tax liabilities, even if the platform advertises "zero commission" trading. Over time, these costs can really compound.

There’s also the taxes. Short-term trading is far less tax-efficient than holding investments for the long run. If you sell a stock you’ve owned for less than a year, profits are taxed as ordinary income, which often means a much higher rate than the long-term capital gains rate applied to investments held for over a year. That means taxes take a bigger bite out of your short-term trading profits than for your long-term investments. When tax time rolls around, you might be surprised to find that you’re keeping less of your trading profits than you originally expected.

In addition, overtrading can increase your portfolio volatility and disrupt your diversification. The more you chase short-term gains, the harder it is to maintain a consistent strategy.

Importance of financial health

Short-term trading can be exciting, but it’s also unpredictable. Even experienced traders don’t win every time. That’s why it’s important to make sure your broader financial picture isn’t riding on how well your trades perform on any given day.

Before diving deep into active trading, ask yourself: Do I have emergency savings set aside in cash? Am I regularly putting money away for retirement in a diversified portfolio? Have I planned for future expenses like a home, a child’s education or family care needs? A healthy financial foundation is critical before chasing short-term trading profits. The foundation is built on steady habits, diversified investments and a long-term outlook.

Importance of avoiding bad trading behavior

Some of the most common trading mistakes – chasing hype, reacting emotionally, or trying to time the market – can quietly drag down long-term performance. The research backs it up: One of the main reasons investors underperform the market is because they panic and pull money out during market downturns, often missing the recovery. Over time, that behavior can matter more than the specific investments they choose.

These emotional challenges are what make day trading so difficult. Academic research has shown that fewer than 1-in-100 day traders outperform the market regularly. That’s not to say it’s impossible to find success, but consistent success with day trading is rare. Developing a steady, research-driven approach and resisting the urge to act on emotion can help keep your portfolio on firmer ground.

If you’re starting to feel like luck is an important part of your investing strategy, it could be time to take a step back.

Why is there a rise in overtrading?

Individual investors are trading more than they used to, particularly during volatile periods, a potential signal of more frequent overtrading. The monthly share of investors under age 40 transferring money to brokerage accounts has more than tripled over the past decade.

Younger investors, in particular, ramped up their trading activity during periods of extreme volatility. During the highly volatile days around the April 2025 tariff announcements, when the S&P 500 index swung by 5%–10% on multiple days, individual investors poured record funds into the market. Retail investor flows surged 2.5 times higher than the average week over the prior year, according to research from JPMorganChase.

Why do some people participate in overtrading activities? There are several things that can contribute to this behavior:

Trading addiction

The ease of trading today is a double-edged sword. Mobile platforms, gamified user experiences and real-time notifications can make trading feel like a game. For some, it becomes compulsive. Over time, this can lead to impulsive trades, disregard for risk and detachment from long-term financial goals.

Pressure from social media

Overtrading has come into the spotlight recently. The years following the pandemic saw a surge in retail trading, fueled by stimulus payments, remote work and access to commission-free platforms. Combined with viral stock stories on social media and online forums, the period amplified short-term trading behavior. Meme stocks became cultural events, but the phenomenon also increased the risk of significant losses for retail investors.

Vulnerable to scams

Online investor communities focused on active trading can be a powerful force for promoting investing and financial independence, but they're easy for bad actors to infiltrate. Overtrading can make investors more susceptible to these scams. The pressure to act quickly on "hot tips" or trending stocks can lead to impulsive decisions without proper due diligence.

One typical example is a pump-and-dump scam, where fraudsters artificially inflate a stock's price through misleading information and then sell their shares at the peak, leaving others with losses. In 2022, eight social media influencers were charged in a $114 million securities fraud scheme. They portrayed themselves as successful traders, flaunting luxury cars and promoting stocks they owned on social media platforms. They encouraged their followers to buy in, promising to hold their stock with "diamond hands" while secretly selling their shares at inflated prices and leaving their followers with the losses.

To protect yourself, recognize the warning signs, such as unsolicited stock recommendations, promises of guaranteed returns and pressure to invest quickly. By staying informed and cautious, you can mitigate the risks associated with overtrading and protect your investments from fraudulent schemes.

Psychological impact of gambling

Problem gambling doesn’t just affect your wallet – it can spill into other areas of your life. Research has linked gambling-related behavior to increased stress, sleep issues, anxiety and even symptoms of depression. In more severe cases, it can lead to financial hardship, strained relationships and a cycle that’s difficult to break.

That’s why it’s important to watch for similar signs when it comes to trading. If investing starts to feel compulsive, you're checking your portfolio constantly, you’re hiding losses or you find yourself trading to escape financial stress, it may be worth pausing to reassess your approach. Investing should support your financial goals, not interfere with your overall well-being.

How to stop overtrading

Luckily, there are several things you can do to safeguard yourself from excessive trading, including:

Have a trading plan

The best way to avoid going off-course is to have a written plan for yourself as a buffer against impulsive decisions. Define your goals, risk tolerance, time horizon and the specific criteria for entering and exiting positions. Having a disciplined investment process can provide some speedbumps to slow those impulsive trades when the social media chatter picks up.

Education and awareness

Knowledge is the key to successful investing, especially if you’re trying to take a more active approach. Understanding what drives the market can make your actions less reactionary. Learn the difference between short-term trading strategies and long-term investing approaches like fundamental analysis. Track your own habits: Do you check your account every hour? Do you feel anxious when you’re not making a trade? Being aware of these patterns is the first step toward managing them.

Implement safeguards

Self-directed accounts give you full control over your investments, but that also means keeping yourself in check. Many brokerage platforms offer tools to help flag risky behavior, track your trading habits and keep your strategy aligned with your original goals.

Here are a few guardrails that can help:

Seek diversification

If you’re passionate about active investing, it’s crucial to find ways to reduce the risk any single bad trade can have on your overall wealth picture. Diversification – investing across a variety of positions and asset classes – can help reduce the volatility of your portfolio. A well-balanced portfolio aligned with your long-term goals typically doesn’t require daily updates.

The bottom line

Excessive trading is easy to fall into, especially for self-directed investors with 24/7 access to markets and real-time data. But high-frequency trades can drain returns through fees, poor timing and increased risk. A strong defense can include a clear strategy, regular self-checks and tools that help keep your investing on track.

If you're unsure whether your trading volume is appropriate for your goals, take a moment to review your account activity, and don't hesitate to contact your brokerage firm with questions.

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