Every newbie trader is told: dont overtrade, limit your trades per day, you only should take 1 trade a week. People talk on forums and articles as if Overtrading is like a giant boogie man that if you take more than 1 or 2 trades a day comes and steals all your capital and slaps your momma in the face on the way out. Even experianced/professional traders have problems with “overtrading” but it manifests itself differently. If a trader has been very successful or is doing very well on a trading floor (one with many workstations). He may think he is on fire. Guess what happens? The risk manager will come over and start looking over his shoulder. Why would the risk manager be curious as to what a winning trader is doing more than the rest of the bunch? Well you might be asking if even professional traders have this problem then it must be real!! [I]Well this is just not true, because in my opinion overtrading does not exist. [/I]
You are probably asking yourself WHY??? What is this lunatic talking about. Here is the deal overtrading is not the real root problem, it is just a certain manifestation of the #1 problem that traders face DISCIPLINE. When you are overtrading you are going to be nearly all of the time trading on emotion, bending your rules of your system, and or risking more than you normally would. These are just general classic mistakes. Lets take the example of the Newbie trader: he is sitting in front of his glowing screen for hours on end, he has this great new plan written up about how he is going to put more pips into his account than ever before, then tell his significant other about how friggin awsome he is, or i just need some action. Well guess what NONE of those reasons are good for making trading decisions. Newbies always feel like they need to have a position on in order to make ‘sitting here all day’ worth it. The reason why the newbie is going to lose money when taking these ‘overtrading’ trades is because they were trades that were not up to par based on his system. He bent his own rules so he could click that buy or sell button and ‘do something’ These are emotional, and ego driven rationalities both have no place in trading.
Lets look at the professional’s problem. He just hit a string of huge wins and has generated more ROI than anyone on his floor. He is fist pumping and shouting as he sees his TP’s get filled. This feeling he experiances isnt boredom, or lack of set ups. Its euphoria. Now he is going to start doing a lot of the same things that a novice would do: take set-ups that are not fully compliant with his system. “Hey this trade has 4 out of the 5 things i need, but I am on fire right now lets hit the bid!!!” This also can lead to increasing position sizes larger than his normal risk tolerance. “I just smashed my personal best of winners in a row lets double up to 500 contracts” Same problem same mistakes same root cause just a different manifestation. Now you can see why a risk manager checks on her traders who have just been so successful, because if they are largely unchecked they will dump their winnings back maybe more. As you can see there is no over trading just lack of discipline. The specific discipline i am talking about is only taking trades that fit the profile of a trade you should take as dictated by your system, nothing else.
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So the moral of the story is: if you have 1000 trades a day that meet your set-up criteria perfectly then take 1000 trades a day. If you are taking 1 trade a day/month/year that does not meet your set-up criteria - that just might be ‘over trading’.[/B][/U]