How to Not To Overtrade

Naslov: How to Not To Overtrade Čet Feb 14, 2008 12:17 am

One of the biggest hurdles all traders have to go through one time or another is overtrading. Even veterans sometimes commit this sin. It is a part of trading, no matter how much we try to prevent it; we get over-emotional or weak with discipline. Before we know it, too many trades have gone by and only realized it after the fact. Other times, we get too arrogant and think that any trade we make is a winner.

There are plenty of books and seminars and coaches who tell their readers and clients that overtrading is bad and that it only benefits the brokers and no one else. True enough. But how does one know when it is considered overtrading? If a scalper is making a hundred trades a day, would he be considered an over-trader? Of course, if he makes tiny wins on every trade he makes become a long-term success, then his style is not considered overtrading. But if he cannot cover the slippages and commissions, then he is overtrading. But the true definition applies when the trader goes off his plan of attack for the day and shoots from the hips one after another.

What are the symptoms and scenarios of overtrading? Here are some guidelines:

• Many trades took place over a very short period of time (This may exclude scalpers). 5 trades or more in a single setup is overtrading. In this scenario, the trader reverses his entry immediately getting stopped out. Then is not overtrading, but when he reverses again after being stopped again. That’s the sign of confusion on what the market is doing.
• The trades are often not within the game plan. The trades are taken even when there doesn’t seem to be a low risk setup appearing.
• The indicators give too many signals. The settings are set too fast that cause too many signals to alert in short periods of time that may not be appropriate for the trader’s style.
• Holding too many positions or trading too many stocks. He may be over-leveraged with too many open positions. This will hinder trading effectively as there are not enough eyes and fingers to manage them all.

Here’s what can be done about it:

1. There is one setup for every market move and usually there should be no more than 2-3 trades for that move. For example, a break-out is a move; a setup for this move is the entry on the break-out. Now that is one trade, 2nd or 3rd comes in only if the trade is pyramiding (if that’s part of the trading plan) when the retracements intermittently in the direction of the breakout.
2. Stop loss placements are hit again and again and the trader keeps re-entering. The stop loss placement may have not been ideal or that the market has signaled a change in the expected behavior. Re-entering is not overtrading, however, upon the 3rd or 4th try, the market has indeed appeared to be in a different mood than what the trader expected. The trader is so convinced that the trade is going to work, he keeps getting back in, leading to more losses. By this time, the trader should exit all trades and stop trading.
3. Except for scalping who use 5-minute or shorter timeframes, setups come at least every 30 minutes. That means, there should not be 3 trades within that period. Hypothetically, if there is a setup every 30 minutes, then the trading day, there should be not more than 15 trades per day. But given the reality of trading, most likely, half of that number is more realistic. If within 3 tries for the setup don’t work, move on.

What other ways can we do to reduce overtrading? The first step is to review the trading strategy the trader is using. He has to review and back-test the strategy to understand how many trades there are in a given period, either a day or a week. Once he averages the number of trades he can see how often the setups come and go and compare them to the results from real trading. Do they match? Are there too many trades over the average? What ways can he do to reduce them? Would change indicator settings help or worsen?

Overtrading can be eliminated by carefully monitoring how the trades come about, on what criteria and checked against the trading plan, setups and charts. Also, verify if there’s an emotional element that may have unconsciously wreaked havoc that may lead to overtrading and try to work to control it.
_________________
Savet „doktora Dabića”: Nema bezizlaznih situacija