The dreaded problem of over trading. People can have an itch to place a trade. Some traders are looking for action, constant action. If they do not have a position on, they feel as though they aren’t themselves. Many traders need their urges fulfilled.
I read this story of a trader who was analyzing a bull market in a particular commodity. The market was going up almost every day for weeks and weeks. But the trader could not bring himself to buy, even when the market was making new all time highs. The trader typically preferred to buy on a retracement and could not just stomach paying top dollar in the market. The trader did not want to buy when the market was making new all time highs. The weeks keep on going buy, the market keeps rallying, but the trader doesn’t have a position on.
But pretty soon, he is talking with his friends and colleagues, and they are making a killing in the commodity, but he isn’t. He gets a little bit jealous of their success and profits. The trader wants a similar success story to tell to people on the social scene. The money would be nice, but this traders has already made his millions. He is interested in having the story of a trading coup to tell people.
Deviation From Trading System
Therefore, even though his trading system is not telling him to jump in, the traders urges are starting to get the better of him. He wants to place a trade. He wants to have exposure. He wants to be in the market. To feel the thrill, and potentially attain the glory.
Well, the trader does ultimately end up buying. And they buy at the top of the market. The market sells off and the trader get crushed taking massive losses. Someone asks the trader how they felt now that they violated their trading rules and bought when there system told them not to.
The trader that just lost millions answered:
The pain of not being in the move was greater than the pain of taking the millions dollars of losses.
And there you have it, the human psychology of certain market participants revealed. This particular trader was suffering pain from NOT having a position on. In order to stop that pain, the trader had to put on a position that violated his trading rules. In the end, it didn’t necessarily matter that the trader took losses, for the pain of not being in the market was greater than the pain of taking losses.
Trading history is littered with examples such as the above, where traders have felt they are missing out on a move and throw on a trade just to satisfy their cravings to have exposure to the marketplace.
Solutions To Over Trading And Not Following Your System Rules
I am assuming that you already have some system that works, some system that you know can generate some very good trades. But you have may have a problem with over trading and those trades that deviate from your system are dragging down your performance numbers for your trading account.
There are many people out there that can have a great trading system, but the trades that they take outside of their system can almost completely erase their profits.
The first and best solution and the ideal you should ultimately work towards is to kick that habit and remove it from your trader psychology. To slay that particular inner trading demon forever. But that is usually a long term goal and can take many months or years. And in the mean time you want to trade your great system and start profiting right away. Only problem is with your great trading system you are mixing in the bad trades and your overall performance is suffering.
Therefore the second best way is to maintain two trading accounts.
Two Trading Accounts
You can have two accounts. Your main account that you only take the trades that fire off from your system. Only the best opportunities. Only the high probability trades.
Then you have another side trading account with less money than the main trading account. How big should the split be? I would say keep your main trading account with 80% of the trading capital, and the other side account with 20% of your trading capital.
So if you have $100,000 in trading capital, then $80,000 would be used to trade your great system. While the other $20,000 would be put into a separate trading account that you will use to fulfill your trading urges.
Over Trading Account
In this account you can go wild and try out any crazy ideas you have. You want to day trade like crazy and have on 5 different open positions in five different currency pairs? Go ahead.
Want to place some crazy late Friday day trade in the currency markets? Go ahead.
You can place a lot of trade at one time if you want. You can day trade your heart out.
You can go trade futures contract that have the volatility your looking for. You want to trade the emini S&P or crude oil contracts and scalp them? Go ahead, satisfy your trading urges.
Don’t leverage up too much in the over trading account. Still use money management, position sizing and risk per trade that is low. The goal is not to blow up that side account. If this over trading account ends up breaking even for the year, that’s great. You fulfilled your urges and broke even on this side account.
The whole goal is to separate the good trades from the bad trades in separate trading accounts. Good trades and perfect trades go into the main trading account. While any crazy trading ideas you want to try out go into the side account.
Preferably have the two trading accounts at different brokers. Don’t do any of that sub account stuff as you may be more tempted to place similar trades in both accounts.
And there you have it – one possible solution to solving the problems of over trading. It is not ideal, but it is the next best thing. That approach can help a trader achieve the desired trading profit and trading return potential that a good trading system deserves.
Trading Is Like Art
Trading can be like art. People who have art collections aren’t going to settle for less than the best. They are not going to mix the best artworks – the high priced artworks with some of the worst, lowliest pieces. They are going to keep the best all together.
The best trades, the high probability trades, the trades where you go for the jugular all deserve company. They love company. They like to be among the best. So you keep them all together in your main trading account. And you just keep adding to your collection of trades where you make a killing on.