How Often a Day Trader Should Trade

Avoiding Undertading and Overtrading

Traders signaling for stock trades

As a new day trader, you may feel unsure about how many trades you should make in a day. It's easy to worry about overtrading or undertrading. Is there a sweet spot for how much to trade?

The simple answer is to trade exactly as much as your proven strategy tells you to trade. Although, if you are wondering about over- or undertrading, you may not yet have a proven strategy. Before you can decide how much to trade, you need to develop a strategy that will help you determine how active to be.

Strategy Dictates Frequency

A well-defined strategy tells you exactly when to enter, under what conditions, and when to get out for a profit or loss. Since day traders take the trades their strategies tell them to take, trading quantity and frequency will vary daily. 

For example, a trend-following strategy could result in many trades on a day when the asset being traded is trending. On a day when an asset is range-bound or barely moving, a trend-following strategy will produce few, or no, trade signals. Conversely, a range-trading strategy will likely produce few trade signals on days when the asset trends, but will produce many on days where the asset's prices move mostly sideways.

Your strategy should act as a filter for how often you should trade. Having strategies for both trending and ranging environments—along with a way to determine which to employ—will allow you to have at least some trades nearly every day.

Maximum Daily Trades

While your strategy determines how often you day trade, overtrading can occur when you take more trades than your strategy dictates. This is often a result of boredom or lack of discipline. Since these trades occur outside of a tested strategy, they are less likely to perform well. They tend to reduce profitability and increase commission costs unnecessarily. 

Although commission costs are often viewed as a hurdle to day traders, this is typically because they are overtrading or aren't using a good day trading method. With a disciplined strategy, commissions aren't typically a major concern.

Minimum Daily Trades

Again, trade what your strategy dictates. When traders undertrade, they typically skip the signals built into their strategies. This is often due to fear of losing or not being ready to trade. Sometimes, though, the strategy may be one that sounds good in theory, but doesn't work as well in reality and is therefore too hard to implement.

Some traders mistakenly believe that undertrading is better than overtrading. This is a false assumption. If you have a strategy that tends to win over the course of many trades, then by skipping trades, you reduce your chances for success.

Let's say you have a strategy that wins 55% of the time. By skipping a trade, you are more likely to skip a winning trade than you are to skip a losing trade. Track your performance, ensure you have a winning strategy, and then take the trades your strategy gives you.

Develop Your Strategy

If you haven't developed, tested, and practiced a day trading strategy yet, focus on developing or finding one that suits your personality and lifestyle. For example, day trading strategies can be developed just for the opening hour of the U.S. market. Typically, you make one to five trades in that hour, and your trading day is very short.

If you want to trade all day, develop strategies that adapt to various market conditions. You will face changing conditions throughout the day as different stocks become more or less volatile, different assets trend or range, and volumes rise and fall.

Once you develop a strategy, it is very important to put it to the test. Make sure it would have been profitable in the past, then practice with real-time data to be sure you can properly implement it. If it proves profitable, that will tell you exactly how much to trade. Don't trade more or less, as both can pose problems. Don't start trading until you have a strategy that tells you exactly when to trade.