So far, we're trading in a seven point trading range today. My earlier posts today have highlighted some trading ideas derived from the range day structure; a nimble trader had a few opportunities to buy below VWAP and sell above.
Given the narrow range, however, each trade has only been good for a relatively small move.
That's a big part of what leads traders to overtrade. If their account sizes are modest, they cannot make as much from small moves as they would like. If they are hoping to make a living from trading a small account, the small moves will be more like frustrations than the good trades that they are.
So, unable to trade larger, they trade more often.
They try to catch ever smaller swings--or they talk themselves into anticipating breakouts that never materialize.
Their problem is not just a trading problem; it's a psychological one: their expectations are unrealistic relative to their account sizes and relative to market volatility.
If you feel that you *need* to get market movement, you'll trade to make that happen--either by vainly playing for breakouts or by trading ever-smaller "setups". Trading expectations that reflect your needs--and not the realities of how markets are trading--is a formula for disappointment.
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3 comments:
I'm FINALLY cured about trading more than volume permits. The word "need" was very strong until I realized what I was doing--a little math convinced me that my need was emotional.
When the six-day range drops below 3% of SPY and narrows in that window, I am now VERY cautious about buying. That's because I want to make 2% on a $6K trade. If I want a 3/4 shot at that, Range has to pop above 3% of SPY. It's about an hour to close on Thur with quad witching tomorrow, so I expect to see some movement this last hour before the races begin tomorrow. But, until I see it, I won't trade.
Dr K
Dr. Brett, it is incredible how timely your posts are.
I recently caught myself over trading and even though i was not losing much, i have been flat the past week and not able to push my equity curve higher.
I know i have setups with an edge, i know most of my ideas are good, but i haven't been patient enough to stick with my ideas and setups due to the low volatility environment.
I believe that the main cause of my over trading was my tendency to try everything possible to meet my weekly profit goals. I have been recently focusing too much on my outcome goals vs. my process goals.
I've been feeling frustration, impatience and impulsiveness which all lead to over trading.
I knew i had to go back to my rules and figure out what i can do in order to stop my poor behavior.
I realized that my risk management plan was flawed and incomplete. I had written down explicit rules on position sizing and how much drawdown i could incur for any given day,week or month before i had to stop trading and re-evaluate. What i did not have written down EXPLICITLY is probably the most important rule of all: A limit on my real time risk exposure. How much am i willing to risk at any given time. I had that number floating in my head somewhere but it wasn't clear and apparent enough and it was a function of my equity curve growth.
In order to add another position i had to be within that risk limit. If my risk exposure was greater or equal to my risk limit i could not add any additional positions, unless i closed out some of my current positions.
This very simple and IMPORTANT rule is already starting to make a big difference on my trading performance.
It is slowing my trading down considerably and giving my trade ideas enough time to mature and work.
My trading prior to this rule was like driving a car with really bad breaks.
Thanks again for all of your great and timely posts.
Sincerely,
Andrew Palladino
Thanks Dr. Brett! Really needed to hear that one today!
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