Overtrading: The Characteristics of Frequent Trading Investors.
While research has shown that a lot of individual investors avoid selling losses, which I covered in my recent post, there has also been evidence for a significant amount of individual traders who trade too frequently which mostly ends in losses. The focus of this article will be whether there is any evidence for certain characteristics or traits that are consistent in frequent trading individual investors
Who trades frequently?
Overconfidence
A strong argument across academic literature is the overconfidence of individual investors. Overconfidence can further be divided into:
- Overconfidence about the certainty of information (miscalibration)
- Overconfidence about ability (better-than-average effect)
- Overconfidence about performance on certain tasks (overestimation)
Research has shown that especially the better-than-average effect has a strong influence on the frequency of trades made by individual investors. These are mostly people who overestimate their ability in trading and see their trading abilites above average to the normal investor.
Gender
According to a study by Barber & Odean (2001), men are more overconfident than female investors because they expect higher portfolio returns. Another study by Deaves et al. (2009) also showed that it is in fact men who tend to overtrade compared to women.
Age
Research on age of frequent traders has shown that an investor’s age is negatively related to trading frequency
So far the research has shown that it mostly young, overconfident men who trade too frequently on traditional markets and while there is currently no evidence on cryptocurrency markets, I am almost certain that the numbers are similar.
How can I prevent overtrading?
A way to prevent overtrading is keeping track of gains and losses by writing them down and monitoring them to potentially alter the trading style if losses exceed gains. Another way to prevent overtrading is writing down a commitment to sell or buy at a certain level and stick to this commitment. In general one can say that self-monitoring and asset control are two key factors that can prevent someone from overtrading.
References
The characteristics of individual investors who trade frequently
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