7 worst trading mistakes #1: Don’t overtrade

Crouching TigerYou’ll often hear traders saying to each other, “Don’t overtrade.” And often they’ll say it with a sad look and a shake of their heads. They may even invoke Ida, the goddess of regretful, retroactive afterthoughts. As in, “I wish I’da…”

Every trader has a story of a day they just got into the overtrading frenzy. If they were lucky, they got out because they came to their senses. Not so lucky, they got out when the money ran out.

They kept getting in and out of trades, chasing the market, seeing themselves get stopped out only to find they were right all along. Their timing was just off. Sound familiar?

Well, as in most things, timing is everything. You can’t have good timing when you are too eager. It’s like pulling a cake out of the oven before it’s done. All the ingredients are there. It’s just not ready.

We often hear that voice in our heads that sees a problem and says, “Don’t just sit there! Do something!” We have to learn to counter that urge with the equally important, “Don’t just do something! Sit there.”

And what do you do while you’re just sitting there? You’re studying your quarry, the way any good predator does before it leaps. When you watch a lion or tiger hunting on TV, you mostly see the pause and then the dramatic strike when it takes down its prey.

What you don’t see, because it would make for very boring TV, is the hours, even days of patient stalking. This is the real work of trading. Looking at charts, identifying price levels, planning entry and exit criteria, and then waiting for the market to come to you.

One mark of a great warrior is that he fights on his own terms or fights not at all.

—Sun Tzu, The Art of War

It helps if you keep your life in balance, so trading doesn’t become a hiding place from challenges you don’t want to face. You know, the important parts of your life. If trading is the best part of your day, stop trading. Go make your life better.

When you come back, the markets will still be there. And unlike the people who matter, they won’t have missed you a bit, however much you might have missed trading them. You are nothing to the markets. A tiny drop of added liquidity.

So you come back and you don’t have so much of that burning need to trade. It’s not the only good part of your day. In fact, it gets in the way of the good parts. But you do it because you’re good at it and it brings you money.

You come back, and you start again doing the work. You study charts, look at relevant news and information, identify price levels, plan your entry and exit criteria, and then wait for the market to meet your conditions.

Then you strike, like a predator, focused and confident and ruthless. Some traders only do a couple of trades a day. They save on commissions as well as stress hormones. And a couple of good trades is all you need.

In fact, some traders only do a few trades a year. I almost did that in 2008. By May I had made enough in options to take at least the summer if not the rest of the year off. Then in September I took up trading again. And I made one of the biggest mistakes. I traded the day after a big argument. With someone I love. My mother. Never trade after fighting with your mother. I should make that a separate trading mistake article, it’s so obvious and important.

When you’re not in the market, which should be most of the time, you do the work. The work includes studying the market, widening your view to monthly, weekly, and daily charts, then zooming in again. Do this especially after a loss, because you’ve already paid the tuition and you deserve to get an education from it so you don’t repeat the mistake.

Otherwise, the only lesson your brain will take from it is a false one: that you’re a lousy trader and there’s nothing you can do about it.

It’s addictive—the rush of adrenaline and hormones and neurotransmitters, the feeling of total focus, the way time seems altered, the way that all other problems seem to recede for a while. That’s why we’re willing to pay so much for that drug. But simply being aware that it’s happening is often all you need to control and master it.

If you feel you just have to trade, that’s a good sign that you shouldn’t.

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