Avoid Overtrading: Less Is Often More

On average, investors with few good trades achieve higher returns than traders with too many transactions. This is, of course, partly due to the higher transaction costs incurred by traders with higher transaction frequencies.

On the other hand, however, it is also due to the fact that traders with too many trades run the permanent risk of destroying their few good deals.

The famous Wall Street psychologist Dr. Brett Steenbarger has an interesting method that he recommends to his clients in the proprietary trading departments of banks to increase their hit rate. The traders should calculate their average number of trades, per day, per week, per month (depending on their trading style) and divide it by two. The result will be the maximum number of allowed transactions. This procedure must be followed until trading has improved.

Personally, I have noticed a significant improvement in my trading style when selecting my trades. This is only logical, just imagine you would only make winning trades and no losses. Within a few months you would be in the seven-digit range, no matter how much seed capital you started with. Of course this is an illusion, because you never really know in advance whether you will get a good or a bad trade, but it becomes clear what I am getting at.

There are quite useful procedures to distinguish a good from a bad opportunity. It is a narrow degree because if you hesitate too long and don’t dare to take risks, you might miss good chances. If you want to earn money on the stock market, you should not be afraid of losing any. Over the years I have established a personal set of rules. This is more or less a book full of experiences, setups, and anomalies of the markets that I have noticed. With the help of these, I try to filter out whether there is a particularly good opportunity for me and whether I could have an advantage over the market at that moment.

Good traders are like order killers

A colleague once compared a good trader to a hitman. Every now and then the order killer accepts a lucrative order, plans in secret and then carries out his work quickly, professionally and systematically. Afterwards he returns to his inconspicuous life.

Much more exciting, however, is what a contract killer does not do. He does not take on every assignment. He never carries out the job immediately. He does not get up every morning and run around shooting, but concentrates on a few good deals. He doesn’t do the job because he’s a bloodthirsty psychopath, but because of the merit and an honorable mission (well, at least in the world of Hollywood).

I used to get caught up in small trading skirmishes on days when I didn’t really have a plan, but I felt like trading. The initial skirmishes often turned into fierce trading battles that sometimes lasted for days. I maneuvered myself into such situations especially when I had a big hit before. Then the motivation to trade is greater, all the receptors in the brain are on alert and sing: “Money, Money, Money.”

Develop patience

Waiting for my own good setups has become one of the biggest challenges in trading for me. It is the daily balancing between the urge to pursue an idea and the sometimes grueling lurking for the situation with the decisive advantage.

This is particularly difficult for me because I am not a particularly patient person. If I want something, I want it now. For me, it has turned out to be a good way to work with my position sizes. If I feel the urge to act, but do not have the unbeatable feeling of a secure advantage on my side, then I just go into the market with half the position size or only with one contract. If it goes well, I’ve given the monkey in my head some sugar and if it goes wrong, ok, then so be it.

The exciting thing about this approach is that sometimes new perspectives only open up in the course of a trade. Do you know that feeling? For example, a trade develops in the desired direction and gives absolute confirmation that the goal will be achieved in any case. Then you can increase the size of the position if necessary if certainty is added. Or sometimes a small loss has caused me to turn my complete expectations of the market on that day upside down and only then to see what things went together to place a good trade. The moment I am in the market, my concentration increases immensely. Sometimes a trade is so exciting that you realize that you have just spent two hours staring at the price in a tense position. Everybody has experienced that. Better than any thriller.

Other possibilities (depending on your own trading style and the chosen financial instruments) are:

  • To set filters, e.g. let the stock market “screen” for certain entry criteria. Most trading platforms offer an excellent screener for this: every trader should know this tool!
  • Use price alerts (to avoid staring permanently at the chart and then finding ideas that are not really there)
  • Have a strategy to open a trade (e.g. never between 12-14 or after 8 pm)
  • Attach conditions to a trade (e.g. never trade against the trend)

If you manage to eliminate only one of two bad trades (to stay in the order killer language), you will bring your trading to a new level very quickly. Try out Dr. Steenbarger’s strategy and force yourself to trade only half of your current trades over a period of time. Your brain will then automatically distinguish the good trades from the bad ones.

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