Buck the Trade, Less Can be Better and More Profitable

Fewer Trades Can Mean Better Trading

There is a curious relationship between profitability and the number of trades you make. Often, a trader will make more money when trading less and suffer the biggest drawdowns when popping in and out of trades every time the impulse strikes. The latter scenario is the curse of overtrading. 

All market players go through periods of poor performance driven by overtrading. The reason is simple -- we feel an overpowering urge to be in the action, regardless of whether there are good setups to exploit. For most traders, overtrading tends to run in regular cycles. It's normal to increase position size and frequency when things are going well. But it's vital that we watch opportunity costs closely when taking on more exposure. We assume larger positions will yield bigger profits, while the opposite is often true.

Markets cycle in and out of good trading opportunities all the time. It starts when the crowd gets agitated and bids stocks substantially higher or lower. Those are the wild times in which traders can make a lot of money. But that level of intensity is a fleeting emotion on Wall Street. Markets tend to run in place the vast majority of the time, forcing traders to be selective about their positions.

These dull periods can be particularly destructive when you overtrade. Smaller losses incur more damage to trading accounts over time than deep stab wounds. In other words, you'll lose more money from small losses triggered by mediocre positions than being on the wrong side of poor earnings, short squeezes or unfavorable FDA decisions. This unpleasant experience is death by a thousand paper cuts.

Sitting on your hands is an excellent way to trade the markets during periods of noise and conflict. It's also a strong discipline that works well for traders who are addicted to the price action and adrenaline rush it generates each day. Overtrading is a tough flaw to conquer, because it doesn't disappear with experience. In fact, there are only two possible outcomes when you overtrade. First, you recognize the error, review your plan and get back into a disciplined frame of mind. Second, you ignore the problem and let it escalate until your account blows up.

The heat of the moment can be overwhelming, inducing poor trading choices we regret right away or after the closing bell. Bad mornings are especially destructive because they can trigger a domino effect that spirals into an entire day of overtrading and dwindling capital. Apathy creates special danger when we overtrade. We can lose so much money in a short period of time that endorphins kick in and dull our growing pain. This removes the fear factor but does little to wake up our internal discipline. In fact, many traders wash out when they hit this critical point, because their senses become too dull to take remedial action.

How can you overcome the overtrading monster? Start with these seven remedial steps.

1. Create a trading diary. Write down every position you take and why it is worth the risk. Then keep one eye on your losses at all times. Pull out the diary and study every trade taken on your bad days.

2. Review the environment. Choppy markets trigger more overtrading than trending markets. Step back before the day begins and figure out what type of market you're really trading. This will lead to profound changes in strategy and discipline.

3. Study the charts. Was that a real pattern, or did you make one up in your head? The cold, hard numbers will keep you out of trouble as long as you're willing to follow their signals. And they're the best way to avoid impulsive behavior.

4. Talk to your spouse. It's hard to fight body chemistry, but dollars and cents need to be separated from thrills and chills. The best reality check I know is to confess my sins to my wife at the end of the day. She understands my trading habits better than I do.

5. Don't try to get even. The markets have no ego, are not out to get you and don't care about your opinion. The sooner you realize there is no revenge factor, the easier it will be to establish the discipline required to avoid overtrading.

6. Walk away. No one says you have to be in the market every single day. Take a few days off or shut down the computer when you reach a predetermined daily loss limit.

7. Study your winners. Look for the common theme when you bring home the bacon. Most overtrading is triggered by a fear of missing out on the next good trade. This can set off a series of bad positions because you're angry that the market isn't paying off.

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