Embed Doc
Copy Link
Readcast
Collections

1
CommentGo Back

Download

TradingMarkets.com stocks - education

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, andthere's also a good chance you did what can be described as over-trading. Thesymptoms of this deadly disease can be put in two categories:

Trading too much

Taking on too large a positionI'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 identifythe 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 traderswho become complacent with their profits and step outside their strategybecause they feel they can't go wrong. Winning is what it's all about, buttaking on too large a position or taking more positions just for the fun of it isa great way to land flat on your face with a big loss. A trader may see him orher self as being aggressive, but in fact they are just being reckless. Manytraders who have been in this business a long time realize that discipline isthe key to consistent performance. As traders, most of us only haveourselves 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 forrevenge after taking a loss. It’s only natural to feel the need for paybackwhen you’ve had your position cut down in size. The mistake people makeis when they say things like “I gotta get it back today,” or “this market’s notbeating me." Acting on emotions like these often gets traders into positionsthey should never take. I’ve made this mistake before: Time ago I had aposition in Grey Wolf (GW) with a reasonable stop loss just under my entrypoint. The stock was gently moving higher through the day. Then, while Iwasn't watching, the price dropped, touched my stop loss, and cruised ever

http://www.tradingmarkets.com/print.site/stocks/education/moneymanag/06082001-15677.cfm (1 of 3)01.11.2004 23:48:54

TradingMarkets.com stocks - education

higher for the day, leaving me behind. I took it very personal and tried toplay catch-up but only ended up losing more. I'm still angry about it, but I'vealso learned a lesson. Strategy is king, and reasons to trade outside ofstrategy have no place in my program. Revenge is no reason to enter atrade, pure and simple.

The third cause of over-trading comes with the belief that you must betrading to be succeeding. Beginning traders can have a difficult timegrasping the concept of patience. This isn’t a profession where the moreyou hack away, the more you succeed. I think of it like baseball -- you mustwait until you see the right pitch. Swinging for the fences or going for thelong shots are not good ways to be consistent. The idea is to avoid risk bytaking positions that you know are most likely to succeed. Striking out toomany times in the world of trading could have you filing for Chapter 11.Discount brokers have done a great thing by lowering commissions, butdon’t see it as an invitation to load up on more trades. A better way toexpend 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. Byrecording all of your entries and exits, and more importantly why you made yourdecisions, you will be able to identify your strengths and weaknesses and stayhonest with yourself.For example, if during the day you find yourself complacent with a nice pile ofwinnings, then "for the hell of it," you decide you can afford to play the other side ofthe market, you would have to record that in a journal. Hopefully, the action ofrecording that decision alone would be reason enough not to do it again. Of courseif a trade based on an emotional decision works out, you will want to see if therewere any technical conditions you could use to do it again -- though emotionsalone have no place in a strategy, and I'm sure you'll be less tempted to trade thatway when you see how ineffective it can be.Your journal could be anything from a simple notebook to a statistic-laden dataplatform. I like to print my charts out so I can mark exactly where the entry and exitpoints were. Beneath the chart I write specifically why I made my decisions. I amhappy to say that after I started doing this, I no longer make any decisions forreasons outside my strategy. I've also found that it's the mistakes that you learnfrom, not the successes. By eliminating bad habits -- one by one -- you can fine-tune yourself into a lean, mean, trading machine.

For The Best Trading Books, Video Courses and Software To Improve YourTrading Click Here

http://www.tradingmarkets.com/print.site/stocks/education/moneymanag/06082001-15677.cfm (2 of 3)01.11.2004 23:48:54