Think You Might Be Overtrading? Here’s A Rule Of Thumb
With the markets simply lumbering around and not
doing anything terrible exciting, it is difficult to say much more
than, “sit tight, trade selectively, etc.” However, one thing is for certain:
there are trades to be made during the day, albeit far fewer than just a month
ago. (I only made five trades yesterday with an average duration of 15
minutes.)Â As I have been mentioning, this current environment demands
adaptation, but more importantly, restraint. The market is playing some cruel
jokes intraday currently. If you are one of those individuals who tries to
extrapolate a trade out of every tick, forget about it. Taking the temperature
of the markets is imperative, regardless of how well the markets are
trading. Trading losses from sloppy or frivolous trades in a fast and volatile
market easily get buried by all the other good trades you did. Nonetheless, it
was a bad habit and should have been nipped in the bud a long time ago. Many
traders who never corrected that tendency back then are now finding that those
sloppy and frivolous trades are no longer “swept under the rug,” they now stick
out like a sore thumb and totally destroy your P&L by the end of the day.
My rule of thumb has always been this:
If your trading costs on any given day exceed 33%
of your gross profit, you probably overtraded.
I know what you are saying. “Hell, if I made $1000 and spent $500 in
commissions, that is still a great day!” I would not argue for a moment. But if
you are honest with yourself, I bet there were some impulsive trades stuck in
there somewhere. It is a natural tendency for traders to let a little euphoria
or frustration take over the trade decision process, which is always where most
of the unnecessary losses come from.Â
So here we are at the end of 2002 in an environment that is probably the most
challenging that most of us have experienced. So what is it that is cutting into
your total return? I would be willing to bet that overtrading is an overwhelming
majority of the responses. While it is difficult to overcome, you will need to
if you truly want to be at the top of your game. For the record, my Achilles
heel is being overly particular about setups. I have no problem sitting on my
hands, which is a good thing, however, I leave many trades on the table simply
because I want too much confirmation. That is the area for me that demands
regular maintenance.
So with respect to the current trading environment, until something gives, be
very selective on your trades, it will pay you huge dividends down the road.
Turning to some observations from yesterday, one cannot ignore the gold
stocks. I love this sector when it catches a bid, and while they do trade with
lots of air pockets, when the conditions are right, they offer good rewards. As
to the recent run-up? The weakening dollar seems to be the only logical
explanation. As the Dollar Index (DXC)
approaches parity (100), the golds may only gain further. In the meantime, look
to trade them on 5- and 15-minute chart setups.
The last few days I have been posting some stocks that I am keeping an eye on
as potential setups. There have been four stocks highlighted thus far and only
two have played out. One, Target
(
TGT |
Quote |
Chart |
News |
PowerRating),
was worth about 50 cents to the downside on Wednesday. I had also mentioned
Apache
(
APA |
Quote |
Chart |
News |
PowerRating) on Wednesday as well. I was
looking for a move above 57 in order to bring in some buyers. As with most
things, trades they never work out exactly in the manner you hope. For
APA it was timing. The trade did not play
out until Thursday when it ripped almost $2 straight up after breaching the 57
level. A pattern is still valid until it is not anymore. I hope that all of you
kept this one on your radar screen yesterday.
In general however, the follow through has been tepid. I will continue to
post some select setups each day. Naturally, the narrow range in the overall
market has a lot to do with it. However, like a coiled spring, the market will
break, and when it does, there will be some good opportunities.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| *915-16* | 1060 |
| 911 | 1053.50 |
| 908 | *1048-45* |
| 905 | 1039 |
| *902-03* | 1033 |
| 899 | 1026.50 |
| 894 | 1012.50 |
| *883-84* | Â |
* indicates a level that is more significant
As always, feel free to send me your comments and
questions. Have a great weekend.