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Trading Lessons

How to Avoid Overtrading Choppy Markets

InvestorEducation / Learn to Trade Apr 14, 2008 - 11:47 AM GMT

By: Nazy_Massoud

InvestorEducation

Best Financial Markets Analysis ArticleDo you know any trader who overtrades?

Do you know him/her intimately?

Overtrading is the most common challenge of trading and source of loss. Do any of the following scenarios sound familiar?


  1. After a few wins, you become overconfident. You start taking trades immediately, feeling invincible. You forget all the rules.
  2. You have a few losing trades. You are under pressure to make the money back. You jump at any opportunity that shows the slightest possibility.
    When the trade goes in your favor, you become more anxious, jump at the next trade, and it goes against you.
    When the trade goes against you, you are even more under pressure and this vicious cycle continues.
  3. You overtrade winners and become excessively attached to losing positions, hoping for a "come-back".
  4. When you are in the red, you get anxious and want to make up all of your losses at once. So you increase the size of your trade and take unwarranted risk.
  5. You are afraid of missing out and you jump at any trade. When it results in losses, you are even more eager to dive into the next trade.
  6. If you do not trade, you get impatient. Then you get impulsive and enter into bad trades. You stay in the bad trades longer that you should. You lose opportunities and you lose focus. It becomes a vicious cycle.
  7. You are bored. Making money is not enough. The challenge is gone. You throw away all of your rules and you trade for the sake of trading, the sense of uncertainty, and excitement.

If you said yes to any of the above, you are not alone. These are the most common problems.

After overtrading, some of the feelings that come up are frustration, anger and stupidity. The truth is that feeling are feelings. What separates the super traders from others is how you react to your feelings.

Following are the strategies to prevent overtrading.

1. Before each trade, clear your mind.

As I was flipping through channels, I came upon an interview with a surfer. He was saying that he knew a big surf would come and he would go underwater. The interviewer asked how does he handle it? He said it is simple. If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.

What does surfing have to do with trading? Well, especially when the markets are choppy, if you overtrade, you could lose all of your capital. However, if you take a moment and think about your trades, you can have much better results.

2.  Have a trading plan and stick to it .

Plans are roadmaps. You want to know where you are headed. Think about it. If you are having a surgery, you want your surgeon to know why he is performing the surgery, where he should start, and what is the expected outcome.

In order to stick to your plan, think about your plans/rules as giving your word. Usually, we associate giving our word as a contract and we do not break it with others.

However, this rule does not apply to ourselves. So treat yourself as well as you would treat your best friend, and keep your word to yourself.

3.  Look at each trade as an individual transaction .

  • Ask yourself:
  • If this was the first trade of the day, would I get into it?
  • What would be the initial size of this trade?
  • Do not look at an individual trade to make up for all of your losses.

4. Create a routine that works for you.

We are creatures of habit. As Aristotle says, "We are what we repeatedly do. Therefore, excellence is not an act, but a habit."

5. Come from abundance.

There are a lot more opportunities. You will get what you expect. You might have heard of the following:

Imagine going to the ocean and taking water from the ocean. You can use a thimble or you can use a huge tub. You can do it once or as often as you want. It does not matter to the ocean, it is up to you and what you think you deserve.

6.  Be patient – look for the right opportunities.

As the saying goes, there are a lot of fish in the sea.

7.  Keep a daily journal.

To start with, keep track of:

  • Where you got into the trade
  • Where you exited the trade
  • Why you got into the trade
  • Why you got out of the trade

After a while, you'll notice your own patterns.

8. Remember, this is a process . It takes time and experience. Rome was not built in one day…

9. Reward yourself.

I know this might sound counterintuitive. A lot of us wait to celebrate and reward ourselves until we do things perfectly. We think that if we start celebrating the intermediate steps, we'll become complacent.

The truth is, to create a new habit, we need encouragement. Imagine a baby who is just starting to walk. S/he takes his/her first step and then falls down. What do parents do? Do they yell and punish the child, or do they encourage and celebrate his/her action? If you said the latter, you are right.

Usually, encouragement works much better than punishment. The idea of celebration is to encourage ourselves…

Trading is simple, but not easy. The greatest difficulty is to accept the simple rules and follow them with discipline.

To summarize, the 9 steps to prevent overtrading are:

  1. Before each trade, clear your mind.
  2. Have a trading plan and stick to it.
  3. Look at each trade as an individual transaction.
  4. Create a routine that works for you.
  5. Come from a place of abundance.
  6. Be patient – look for the right opportunities.
  7. Keep a daily journal.
  8. Remember that this is a process.
  9. Reward yourself.

A final word of caution: Don't let the simplicity of these methods fool you. Do not assume that a method has to be complex in order to work. These methods are simple and effective.

Remember, the only things that will change your trading results are your actions and the decisions that you make.

Here is to making trading success your habit™,

By Nazy Massoud

PS. For more Mental Edge tips and reports on how to have more profitable trades, go to www.MentalEdgeTrading.com .

Copyright © 2008 Nazy Massoud

ABOUT THE AUTHOR : Nazy Massoud, a Wall Street Insider, shows traders, investors and hedge fund managers how to develop the mental edge to execute trades more profitably. For more tips and a FREE report on "The 3 Biggest Psychological Triggers That Can Make or Break a Trader," go to www.MentalEdgeTrading.com .

Nazy Massoud Archive

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