Today’s Trading Lesson From TradingMarkets

Editor’s Note:

Each night we feature a different lesson from

TM University. I hope you enjoy and
profit from these. E-mail
me if you have any questions.

Brice

The Silent Killer Known As Over-Trading

By Daniel Beighley

TradingMarkets.com

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)
  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.