The more you trade, the more you under perform (over-trading)

Hi Traders,

I hope everyone had an amazing weekend. This weekend in London was very cold and very strong wilds which did not helped me at all so today I am not feeling 100% but what can I say? I love my job, I love what I do so I wont let that stop me.

Anyway, today I want to talk about something that many people, including myself did on the start of my trading career. If I started knowing this I would have avoided many looses that I had. But to be honest, I knew it but I thought it was not true.

Today I want to speak about 'Over Trading'. It is a very complex topic to speak about because many traders out there wont agree with me. They might say that every single one has your own trading methodology/strategy and they should continue. To be honest, they are right but as my parents always told me: ''Everything has your own limits''.

Sometimes overwhelming feeling that traders experience that makes them want to enter a trade when no trade worth taking is there, is one of the many emotional feelings they must conquer with logical thinking if they want to make money consistently in the market. The most practical way to use logic to conquer the emotions of over-trading is simply to trade less frequently.

• How does trading less lead to bigger profits?

Trading less frequently than you do right now is a very good way to give a boost to your trading account. When you restrict yourself to only entering a few positions a week or even a month, you will naturally give more thought to the trades you take, and you will have a better chance at picking winning trades because of this. Simply put, trading less is a filter, just like trading higher time frames acts like a filter for the noise of lower time frames, trading less is yet another filter that traders can use, think of it as the final filter that you use before entering any trade.

It is a good idea to restrict your trading to a certain low number of trades each week or each month, at least until you become a consistently profitable trader. Let’s say you write into your trading plan that you will only allow yourself to enter three trades per week, if you truly follow this rule you are going to have to use the filter of discretion for each trade setup you contemplate taking because most traders find themselves wanting to trade a lot more than three times a week or less. This technique will work to improve your winning percentage over-time, and it will also grow your trading account much faster than you think.

When we talk on this website about “mastering one price action setup at a time”, using discretion and taking a small number of well-defined and well-placed price action setups is how this is accomplished. Developing your ability to read a price chart and to spot the highest probability price action setups, is something that comes via patience, and you can work on enjoying and improving your patience by accepting the fact that the less you trade the more you are likely to profit. Anyone who has traded the forex market for any length of time knows that often what you “feel” like you want to do, or your first urge after looking at a price chart, is wrong. By deciding to take a small number of trades each week or each month, we force ourselves to step back and really put our objective thought processes to work prior to putting any hard earned money on the line for any particular trade setup.

• You cannot control the forex market:

There is perhaps nothing worse than losing money that you have toiled and sweated to obtain because you were trigger happy in the market. We all can agree that it is exponentially more time consuming and difficult to make money in this world than it is to lose it or spend it, a sort of inverse analogy to this is losing weight; it’s really easy to gain weight but very difficult to lose it.

Armed with the knowledge that losing money is exponentially easier than making money, no matter what the circumstance or profession, it is a very curious fact that so many beginning and experienced forex traders continually give in to the temptation of over-trading. Most traders rationalize over-trading to themselves by thinking that by trading more frequently they are somehow taking advantage of the market or that they are even influencing or controlling the market. The ironic thing about this pattern of thinking, besides the fact that it is completely erroneous, is that the degree to which a trader tries to control the market by over-trading, is about equal to the degree they will experience loss or failure, in essence, by trying to control the forex market it literally controls you by stirring up your emotions.

Unfortunately, the forex market doesn’t care about you, your problems, your emotions, or your life. The market is not a living entity that cares about anyone, it is essentially just a world-wide stage where people have access to leverage, profit opportunities, and loss opportunities, and the degree to which they conquer their own mind is the degree to which they prosper in the market. The belief that many traders harbor that when you trade you are somehow “competing” against every other trader in the world is simply not true, you are competing against only one trader when you enter the market; yourself. You can only control yourself when you enter the market; this is done practically by pre-defining your trading strategy and having a forex trading plan. You have two options as a trader; control yourself and react with sniper-like precision to whatever the market offers you, or get caught up trying to over-analyze what will happen next in the market: also known as being controlled by the market. Just as in life you have the option of letting other people dictate how you feel or dictating your own feelings, no matter what the situation, so in forex you can let the market control how you feel or you can remain in control of how you feel – this is done practically by not over-leveraging or over-trading.

• How to achieve a “less is more trading mind-set”:
Practically speaking, what are some ways that we can begin implementing the knowledge that trading less leads to making more consistent profits in the forex market? One way to do this is to understand that not being in the market at all, or being “flat” the market, is a very valuable position. Think about it this way; if you were to over-trade and lose a bunch of your hard-earned money really quickly as a result, how long would it take you to make back this money at your job? So, essentially you have not only lost money, but you have also lost time, because you spent time to make that money, by simply not being in the market at all you would be much further ahead, this means that not being in a trade is actually a profitable position.

To begin harvesting a less is more trading mindset, start thinking about your time on the “side-line” as a profitable position, instead of thinking that you are missing out on some great opportunity in the market that will never present itself again. The forex market will always exist, unless some global catastrophe occurs and ends human civilization as we know it, there will always be opportunities to profit in the forex market, so there is no need to rush any trade or to over-trade. Knowing these facts and consciously reminding yourself of them is how you develop into a patient and precise trader, it takes a daily effort, you can’t just read this article and then forget about it, you must mentally practice the idea of trading less and you must believe that there is no need to over-trade because there will always be more opportunities. When you really arrive at the mental destination of believing everything in this article, and trading from the point of view that not being in the market is a profitable position, you will actually start to make MORE money FASTER, it really is quite amazing. Most traders never make it to this realization though, because they simply cannot overcome the primitive emotional urge to trade every single possible setup they see.

By using a simple trading method like price action trading, traders have the best strategy to use to develop their discretionary chart reading skills from. Learning to spot the highest-quality price action setups from confluent levels is one of the most accurate ways to trade, it is both an art and a skill, and the art aspect is partially a part of how comfortable you are in waiting for the perfect trade, sitting on your hands until you see a price action setup that is almost screaming at you to trade it.

As Warren Buffet also said: ''Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."

Good Luck!

By Thiago Duarte
Chief Strategist at Duarte Investment Group 
thiago@duarteinvestmentgroup.com
@thiagotrader