Firstly, if you are thinking that making more trades means diversifying risk and will help you in risk management than you are on wrong path. As a trader it is very important to trade the finest and high probability setups. If you are making 2-3 quality decisions(trades) per day, it is more than enough for making consistent profits.
But many trades become victim of over trading. They take multiples trades in very first hour of trading session and makes heavy losses. They get frustrated by their performance and becomes spectator for remaining day. Then they see the actual trade that they planned before is working exactly in their direction. This cycle continues and they keep over trading and getting frustrated and keep blaming external factors for their trading performance.
So, lets discuss what exactly over trading is and its side effects.
Over trading is something many traders struggle with. The reason why many over-trades has two major underlying reasons.
Before we dive into those, I’d like to point out some key things about it. They are:
1) “Feeling the need to be in the market”
2) “I get impatient sometimes”
But before I get into the reasons why many new traders over-trade, I need a working definition of ‘over-trading’.
My definition of over-trading is as follows.
Assuming you are working with a trading plan, ‘over-trading’ is either:
a) taking any trade/s outside of your trading plan, or
b) taking any trades which cause you to exceed your maximum risk limits
If you hit any of the two qualifications above, you are over-trading.
Notice I mentioned nothing about:
a) the number of trades and
b) the time frames.
This last variable is highly relevant.
One key piece of mis-information around us is “higher time frames are better than lower time frames”. Many people believe that “lower time frames are just noise and higher time frames give better signals”. Despite the fact professional bank traders trade intra-day.
You can over-trade on any time frame. The time frame is not the root cause of over-trading. A lack of discipline is.
If you have not wired your brain to mentally execute your trading plan, the time frame will make no difference. Just like if you have the habit of over-eating, you will do so whether you are at a restaurant or your own kitchen. The habit is within you and doesn’t just disappear when you change environments.
One of my student complained me about his over trading problem.
He mentioned, “I traded on hourly time frame and daily time frame only for analysing as well as execution. But still I do over trading. “
For him, the time frames are completely irrelevant. His impatience takes over regardless.
If you want to solve the underlying root of over-trading (discipline & mental execution), you have to re-wire your brain.
How to overcome over trading?
1) Limit risk
For my students, I recommend having three to four risk thresholds as part of their trading plan.
1) A max risk per trade
2) A max risk per day
3) A max risk per week
4) A max risk per month
As long as I haven’t hit my risk limit per day, I’ll keep attacking the markets, sometimes buying and selling in the same day.
In my humble opinion, you should not be trading the markets without a trading plan.
“Your trading plan needs to define your actions & mental execution every time you sit down to trade.”
FYI, I trade the 5 min charts when trading price action intraday. My mind is as calm as a Hindu cow whether I’m trading the 5m or daily charts. The time frame is irrelevant because I’ve wired discipline into my brain. Many of my students also trade the intra-day time frames, and none of them face over trading issue once they imply above techniques at their mental level.
My definition of over-trading is:
a) taking any one trade outside your trading plan and
b) taking any trade which causes you to go over your risk limits.
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