The Silent Killer Known As Over Trading

  • August 6, 2002
  • Daniel Beighley

Ever
say to yourself, “What
made me take that trade?” I think we all have, and there’s also a good
chance you did what can be described as over-trading.
The symptoms of this deadly disease can be put in two categories:

  1. Trading
    too much

  2. Taking
    on too large a position

I’m
going to assume traders reading this are smart enough to have a strategy. Having
a strategy is crucial to meeting goals and avoiding unwanted trades. Whether
your style is scalping or intermediate-term, this lesson will help identify the
psychological causes behind making those trades you never should have.

There
are
three main causes of over-trading:

  • The
    first cause is carelessness or feeling lucky. This is common in traders who
    become complacent with their profits and step outside their strategy because
    they feel they can’t go wrong. Winning is what it’s all about, but taking on
    too large a position or taking more positions just for the fun of it is a
    great way to land flat on your face with a big loss. A trader may see him or
    her self as being aggressive, but in fact they are just being reckless. Many
    traders who have been in this business a long time realize that discipline
    is the key to consistent performance. As traders, most of us only have
    ourselves to answer to, and it’s often very tempting to let one fly on a
    whim; but is that really any different than gambling?

  • The
    second cause of over-trading comes when a trader tries to go for revenge
    after taking a loss. It’s only
    natural to feel the need for payback when you’ve had your position cut
    down in size. The mistake
    people make is when they say things like “I gotta get it back today,” or
    “this market’s not beating me.” Acting on emotions like these often
    gets traders into positions they should never take.
    I’ve made this mistake before: Time ago I had a position in Grey
    Wolf
    (
    GW |
    Quote |
    Chart |
    News |
    PowerRating)     with a reasonable stop loss just under my entry point.
    The stock was gently moving higher through the day. Then, while I wasn’t
    watching, the price dropped, touched my stop loss, and cruised ever higher
    for the day, leaving me behind. I took it very personal and tried to play
    catch-up but only ended up losing more. I’m still angry about it, but I’ve
    also learned a lesson. Strategy is king, and reasons to trade outside of
    strategy have no place in my program. Revenge is no reason to enter a trade,
    pure and simple.

  • The
    third cause of over-trading comes with the belief that you must be trading
    to be succeeding. Beginning traders
    can have a difficult time grasping the concept of patience.
    This isn’t a profession where the more you hack away, the more you
    succeed. I think of it like baseball
    — you must wait until you see the right pitch. Swinging for the fences or
    going for the long shots are not good ways to be consistent.
    The
    idea is to avoid risk by taking positions that you know are most likely to
    succeed. Striking out too many
    times in the world of trading could have you filing for Chapter 11. Discount
    brokers have done a great thing by lowering commissions, but don’t see it
    as an invitation to load up on more trades. A better way to expend energy
    would be to look for more setups.

So
What’s the Cure for Over-Trading?

The
best thing you can do to avoid the trap of overtrading is to keep a journal. By
recording all of your entries and exits, and more importantly why you made your
decisions, you will be able to identify your strengths and weaknesses and stay
honest with yourself.

For
example, if during the day you find yourself complacent with a nice pile of
winnings, then “for the hell of it,” you decide you can afford to play
the other side of the market, you would have to record that in a journal.
Hopefully, the action of recording that decision alone would be reason enough
not to do it again. Of course if a trade based on an emotional decision works
out, you will want to see if there were any technical conditions you could use
to do it again — though emotions alone have no place in a strategy, and I’m
sure you’ll be less tempted to trade that way when you see how ineffective it
can be.

Your
journal could be anything from a simple notebook to a statistic-laden data
platform. I like to print my charts out so I can mark exactly where the entry
and exit points were. Beneath the chart I write specifically why I made my
decisions. I am happy to say that after I started doing this, I no longer make
any decisions for reasons outside my strategy. I’ve also found that it’s the
mistakes that you learn from, not the successes. By eliminating bad habits —
one by one — you can fine-tune yourself into a lean, mean, trading machine.