How not to overtrade?

LeeD · Dec 10, 2009

I am starting to find that the main drag on my trading performance is overtrading. Quite often I enter a position or close a position for psychological reasons beyond coviction in a trade. I have figured out a few specific reasons:
1) Boredom, I want to have a position on most of teh time... and I enter a trade without serious conviction
2) Panic. I may close a position due to a large drawdaown. Often I re-enter at a better level than the stop price. More often I re-enter at a worse price though
3) Earge, sometimes I enter a trend which is about to run out because I picture how much potential profit I have already missed. I consider this missed profit as an indication of how much I could make if the trend continues
4) Fear of a loss, after I suffer a loss (even if I am seriously up on the day) I try to make the money back by entering many uncompelling trades, like in 1) "boredom"
5) Stress., sometimes I close a position with great profit potential because the price has been fluctuating around the open price for a while.

Are there any techniques you use to make your trading more rational? Are there specific cures against the irrational decision I described above?

tripleE · Dec 10, 2009

Quote from LeeD:

I am starting to find that the main drag on my trading performance is overtrading.

As your broker, I don't think you are overtrading.

focusonmoney · Dec 10, 2009

Quote from LeeD:

I am starting to find that the main drag on my trading performance is overtrading. Quite often I enter a position or close a position for psychological reasons beyond coviction in a trade. I have figured out a few specific reasons:
1) Boredom, I want to have a position on most of teh time... and I enter a trade without serious conviction
2) Panic. I may close a position due to a large drawdaown. Often I re-enter at a better level than the stop price. More often I re-enter at a worse price though
3) Earge, sometimes I enter a trend which is about to run out because I picture how much potential profit I have already missed. I consider this missed profit as an indication of how much I could make if the trend continues
4) Fear of a loss, after I suffer a loss (even if I am seriously up on the day) I try to make the money back by entering many uncompelling trades, like in 1) "boredom"
5) Stress., sometimes I close a position with great profit potential because the price has been fluctuating around the open price for a while.

Are there any techniques you use to make your trading more rational? Are there specific cures against the irrational decision I described above?

The only reason why you are doing these things is because you lack confidence and understanding.. Once you understand how the market works it will bring you confidence.. You will have to build a system base on how the market works.. Once you have that most of your problems will go away..

Redneck · Dec 10, 2009

Quote from LeeD:

Are there any techniques you use to make your trading more rational? Are there specific cures against the irrational decision I described above?

Discipline Sir

But then Iâm just a dumbass trader so what do I know anyhow

Regards

RN

Illum · Dec 10, 2009

Well you should not be panicking. Know how much you are willing to lose on any trade. You shouldn't be too emotional about it. Think of whatever you are trading as worthless garbage. I do, I think of um like baseball cards, one day you will realize they are junk. Stand by your trade until the results are in. In order to stop over trading, just move your stop up after a higher low, or down over a lower high, depending long or short. You can also do the take half off thing, if you close um out on emotion.

But I would definitely get rid of the panic one first. Put a trade on and let it happen, accept the risk of the trade. It works or not, but don't panic. Have an acceptable loss per trade and you can let them work out.

Specterx · Dec 10, 2009

Quote from LeeD:

I am starting to find that the main drag on my trading performance is overtrading. Quite often I enter a position or close a position for psychological reasons beyond coviction in a trade. I have figured out a few specific reasons:
1) Boredom, I want to have a position on most of teh time... and I enter a trade without serious conviction
2) Panic. I may close a position due to a large drawdaown. Often I re-enter at a better level than the stop price. More often I re-enter at a worse price though
3) Earge, sometimes I enter a trend which is about to run out because I picture how much potential profit I have already missed. I consider this missed profit as an indication of how much I could make if the trend continues
4) Fear of a loss, after I suffer a loss (even if I am seriously up on the day) I try to make the money back by entering many uncompelling trades, like in 1) "boredom"
5) Stress., sometimes I close a position with great profit potential because the price has been fluctuating around the open price for a while.

Are there any techniques you use to make your trading more rational? Are there specific cures against the irrational decision I described above?

If you're overtrading, "just stop it..."

Limit yourself to 2 trades max per day and stick with it. Feel free to trade less and take days off (you can of course watch the market without trading).

People construct all kinds of arguments for why they shouldn't do this - "I don't want to limit my opportunities," etc. But you only need a few high-quality trades to make your month, and by drastically limiting your trades in this way you create the "mental space" to operate without running into the psych issues you mention, or at least keeping them to a minimum.

Obviously this cannot compensate for the lack of an edge, but you might be surprised at how much better your performance becomes when you pace yourself like this.

LeeD · Dec 11, 2009

Quote from tripleE:
As your broker, I don't think you are overtrading.

hehe!

Quote from focusonmoney:
The only reason why you are doing these things is because you lack confidence and understanding..

Beliefe in one's infallibility is not among positive traits for a trader. I do lack confidence, at leats on occasions. This is the way of finding out that "there is a difference between knowing the path and walking the path."

Quote from focusonmoney:
Once you understand how the market works it will bring you confidence.. You will have to build a system base on how the market works.. Once you have that most of your problems will go away..

This is comforting. Thanks!

Quote from Redneck trader:Discipline Sir

Feel free to consider a quiation about how to improve discipline a part of the topic. What techiques do you use? Do you use, say auto-hypnose, or do you just restric coffee intake?

Some rules (such as daily stop-loss) can be mechanized. Others (such as "enter a trade only on strong conviction") can be eroded by one's emotional state.

Quote from Illum:Think of whatever you are trading as worthless garbage.

This doesn't seem to work for me. The effect I achieve is actually quite opposite. I start doing more trades just out of interest regarding whether they would or would not work out.

Quote from Illum:But I would definitely get rid of the panic one first. Put a trade on and let it happen, accept the risk of the trade. It works or not, but don't panic.

That's a very good point. Panic is the most difficult state of mind to remain rational in.

Quote from Specterx:If you're overtrading, "just stop it..."

More easily said than followed

My question is exactly about how to create a state of mind in which I would folow this rule thoughtfully.

Quote from Specterx:Limit yourself to 2 trades max per day and stick with it.

That's a good idea. I should think of how to implement it. Maybe if I set this rule I will be able to improve the success rate of my trades. If it doesn't I would walk out with a "down" day way more often then I do now.

Quote from Specterx:People construct all kinds of arguments for why they shouldn't do this - "I don't want to limit my opportunities," etc.

Luckily. I have passed the stage when I looked at a price move and thought "Look at all this profit I could have made".

Quote from Specterx:But you only need a few high-quality trades to make your month, and by drastically limiting your trades in this way you create the "mental space" to operate without running into the psych issues you mention, or at least keeping them to a minimum.

This is interesting! In the "profit I could have made" space I often observe that I lack boldness to stick with a trade to let it realise its full potential. I find it too difficult to watch a substantial gain evaporating. The reason is I know more often than not I would end up with a small loss if I fail to realise profit. I appreciate a few good trades is all one needs to be a success but currently I am not ready to abandon the comfort of ending most days in the black... even at the expense of not being able to realise the potential of those few "big" trades.

Quote from Specterx:Obviously this cannot compensate for the lack of an edge, but you might be surprised at how much better your performance becomes when you pace yourself like this.

Knowing this helps someone else is a big deal. Any suggestions regarding what additional rules, thoughts or considerations may help create the right "mental space" for capturing those "few-a-month" trades?

indahook · Dec 11, 2009

Quote from LeeD:

Are there any techniques you use to make your trading more rational? Are there specific cures against the irrational decision I described above?

Time is the only cure. You will get sick of your poor decision making or you will blow out. Eventually one over powers the other.

Not many people can beat themselves. Can you?

tomdavis · Dec 11, 2009

Quote from LeeD:

I am starting to find that the main drag on my trading performance is overtrading. Quite often I enter a position or close a position for psychological reasons beyond coviction in a trade. I have figured out a few specific reasons:
1) Boredom, I want to have a position on most of teh time... and I enter a trade without serious conviction
2) Panic. I may close a position due to a large drawdaown. Often I re-enter at a better level than the stop price. More often I re-enter at a worse price though
3) Earge, sometimes I enter a trend which is about to run out because I picture how much potential profit I have already missed. I consider this missed profit as an indication of how much I could make if the trend continues
4) Fear of a loss, after I suffer a loss (even if I am seriously up on the day) I try to make the money back by entering many uncompelling trades, like in 1) "boredom"
5) Stress., sometimes I close a position with great profit potential because the price has been fluctuating around the open price for a while.

Are there any techniques you use to make your trading more rational? Are there specific cures against the irrational decision I described above?

What are you trading? How often are you trading? Specifics would be helpful.

For example, when trading the ES and CL, for my style of trading, I know there are only a handful of good moves each day. If I'm trading more than 3-5 times per day, I'm trading too much. I start each day with a clear picture of what I'm looking for and with the knowledge that there will only be a few high probablility setups.

You need to make a decision about how much you should be trading based on your trading style and the characteristics of the market you're trading. You should have a clear picture of this before you make your first trade.

Specterx · Dec 11, 2009

Quote from LeeD:

More easily said than followed My question is exactly about how to create a state of mind in which I would folow this rule thoughtfully.
...
That's a good idea. I should think of how to implement it. Maybe if I set this rule I will be able to improve the success rate of my trades. If it doesn't I would walk out with a "down" day way more often then I do now.
...
Luckily. I have passed the stage when I looked at a price move and thought "Look at all this profit I could have made".
...
This is interesting! In the "profit I could have made" space I often observe that I lack boldness to stick with a trade to let it realise its full potential. I find it too difficult to watch a substantial gain evaporating. The reason is I know more often than not I would end up with a small loss if I fail to realise profit. I appreciate a few good trades is all one needs to be a success but currently I am not ready to abandon the comfort of ending most days in the black... even at the expense of not being able to realise the potential of those few "big" trades.
...
Knowing this helps someone else is a big deal. Any suggestions regarding what additional rules, thoughts or considerations may help create the right "mental space" for capturing those "few-a-month" trades?

There are no guarantees of course, but assuming you do have an edge I suspect your success rate would improve. The process of discretionary trading places great demands on your psyche: being in tune with the market, managing trades, all this requires energy and focus. For newer or beginning traders these are in very short supply, and it's VERY easy to push yourself too hard without even realizing it.

Say you've got a goal to lift 1000 pounds; you don't just walk in the gym and pile on the weight, you have to build up slowly (take only a few trades per day), and give yourself a lot of time to recover between sessions. It's the same with trading: initially one can only achieve the proper mental state for brief periods, and you need to take long breaks to keep yourself on an even keel.

If you take one trade for the day and it's a loser, shut down for the day and take the time to reflect. If you take one trade and it's a winner, shut down for the day to bank your profits, and focus on hitting those good trades day after day. In either case, you safeguard your emotional and mental stability. Take the rest of the day off, go to bed, let the subconscious feelings of fear and greed dissipate, and you'll be ready to trade fresh the next day.

Regarding "big" trades: take the ES. 20 points per month, per contract is a reasonable goal (10% return on capital @ $10k/car), and this can be achieved with just three or four good intraday trades, making 4-7 points each. There is just no possible reason that anyone should have to take 100 trades a month (or even 30-40 a month) to get those three winners.