What is overtrading?
The meaning of the term excessive trade is embedded in the name of the term itself and refers to any area of trade. This term is most widely used when trading on the stock exchange, the Forex market, in a business based on the production and sale of their goods.
Overtrading on the exchange overtrading
results are the reason traders fail, and very few people understand why they trade too much, and even fewer traders know how to stop this bad and costly habit. Excessive trade in business.
Suddenly, the business will need new resources, such as more staff, inventory, and perhaps even more office and warehouse space. Lack of resources can mean that contract execution disruptions begin. Without the execution of contracts, there will be no cash receipts as payment for the execution of the contract. Perhaps there will be lawsuits from customers. Problems in the case of excessive trading can snowball, and the joy of huge sales in the recent past will disappear instantly. Excessive trade is the reason for the bankruptcy of a large number of companies in Europe. Causes of Excessive Trading In business,
one of the main reasons is the absence of a business plan or forecast in a business. Sometimes the situation is influenced by seasonal trends, sales of a certain product increase.
There is no observance of money management on the exchange , fascination with micro contracts, round-the-clock monitoring of the trading terminal, and others.
Signs of overtrading
Lack of cash flow. A warning sign is a situation in which you constantly have to regularly borrow money.
Small profit. As profits diminish, it becomes more difficult to maintain a business, especially in a rapidly changing market.
Excessive borrowing. Warn lenders about financial difficulties. Borrowing money to pay monthly bills and pay suppliers is certainly not practical.
Loss of supplier support. During the initial phase of sales growth, most suppliers will be happy to provide additional resources to meet demand. However, delays in payment for deliveries will begin, and stocks will instantly decrease. The company will not have enough materials to continue working.
Avoiding Excessive Trading
Tracking cash flows is critical to maintaining a healthy business. Regular and realistic business forecasts need to be made, taking into account historical and competitor data. Systematic work to reduce costs, especially those costs that do not affect the production of goods and the supply of services.
What to do?
If the situation of excessive trade has already occurred, it is necessary to look for alternative methods of financing the business. Seek immediate advice from specialized business rescue funds to avoid bankruptcy or closure of your company.
The concept of excessive trade is quite broad, in particular, we can talk about at least three areas:
- excessive trade from a business point of view;
- excessive trading from the point of view of an individual investor;
- excessive trading from the point of view of a broker or manager.
- Let's consider each of the options separately, since the meaning and principles are slightly different.
Excessive trade from a business point of view.
Excessive trade (from the company's point of view) is a situation when the company is too actively increasing the volume of sales of goods or services provided.
We seem to be accustomed to the fact that the more you sell, the better, but this is not always the case, since there is always a certain limit, above which the efficiency decreases significantly, since there is a need for borrowed funds, which will cost more and more with each subsequent loan.
over-selling causes the following cycle :
- a large volume of sales forces them to resort to borrowing to purchase components (goods, raw materials, etc.);
- an increase in borrowing leads to an increase in interest expenses;
- an increase in interest expenses affects net profit and working capital;
additional borrowing leads to an increase in interest expenses.
- a decrease in the size of working capital makes it necessary to resort to additional borrowing;
As a result, the company will most likely experience perpetual problems with working capital and liquidity, and all profits generated by excessive trade, well, or a significant part of it, will go to cover debts to creditors.
It is also worth noting that in the field of trade, excessive trade can be called situations when a point of sale cannot serve the current flow of customers.
Overtrading from the perspective of an individual investor.
Overtrading (for an investor) - Excessive (too frequent) buying or selling of financial instruments and assets.
To simplify a little, excessive trading involves frequent and unsystematic market entry and exit. There are three common overtrading options:
- Over trading - involves imitation of the actions of "successful" traders (the problem here is that when a deal is opened on someone else's advice, the trader has no opinion when to close it, and therefore he can do it sooner or later, which leads to excessive and unnecessary trading );
- quick exit - assumes a quick closing of deals (I wanted 100 points of profit from the area, but closed at 10 because I was afraid, and then reopened, etc.);
As a result, due to excessive trading, the trader loses money where he shouldn't have lost it:
- fan trading - involves the chaotic purchase of a large number of assets (most often justified by diversification or some kind of expectations, but in fact it is a simple spray).
- pays extra commissions;
- opens unnecessary deals;
- spends money due to spread, etc.