Saturday, March 3, 2012

Itchy fingers and overtrading

Overtrading is the bane of many traders. It's the temptation of placing trades just for the sake of trading, and can hurt your bottomline when you're compelled to trade poor setups. This is something I grappled with late last year. Here are some techniques and principles that I've discovered over time to help control my "itchy fingers".

Trade daily timeframes

Trading the daily TF constrains your window of opportunity to the start of the new market day only. Depending on your level of analysis and how many pairs you're willing to trade, this "window of opportunity" to enter pending trades may only last an hour or so. Once that window is closed, your trading is done for the day.

Use pending orders

Try to avoid trading "live" as these decisions tend to be impulsive and emotional. Instead, identify key points on your chart where you think a high-probability trade should occur, and use a pending order that will trigger once that point is reached. Wait for the market to come to you.

Close your trading terminal once orders are complete

Don't stare at charts all day. Every moment spent staring at a chart increases the temptation to trade. It's easy to get suckered by an unexpected rally or crash out of fear of "missing the ride". Once your pending orders are complete, switch off and do something else. Leave the market to sort itself out - if you did your homework properly, you can't do anything more for your pending orders, so leave them to their fate.

Use other traders' trading histroy as a guideline

The mentors I study typically trade 5-10 times per month. If I find myself significantly over this figure, there's a good chance that I'm overtrading. Try to find fellow traders or mentors who trade with a similar strategy and philosophy, and use their history as a guideline for your own trading.

Control your emotions

Emotional control is fundamental for any successful trader. Trading should be BORING. If you find yourself getting emotional, cease trading and take a break. The market will always be there tomorrow.

Avoid babysitting

Don't babysit your orders, especially once they are triggered. If you've properly managed your risk (entering stop loss and take profit targets), there's no reason for you to "supervise" your order. The temptation to cheer or cry over price movement increases greatly once you're in an order, which in turn may encourage you to modify your TP and SL. Once you do this, risk management is compromised and you may as well trade without any stops.

Diversify trade-related activities

If you are a serious trader, you'll spend most of your free time pursuing trade-related activities. Instead of staring at charts all day, diversify your activities. Research, backtesting and self-analysis help you improve as a trader, and you don't need to be staring at a live chart to perform them.

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