Friday, October 7, 2011
Thursday, October 6, 2011
Are You Under Or Overtrading?
One thing that all traders will eventually need to consider is how much should be traded. Will they make one trade per day, 100 or more? While how much to trade may just happen naturally, every trader should stop and evaluate how much they are trading and if they are possibly under or overtrading their specific style or system. Scalping styles generally require lots of trades, while positions traders need to be more selective in the movements the trade. Each style is different, and too many or too few trades could potentially harm a trader's profits.
Learn a Little About Yourself
The first thing you need to decide is what kind of trading you like to do. If having to watch every tick of the ticker and every change in the quotes would drive you crazy, chances are you don't want to be a scalper. If you like the high pace and being highly involved in the market every second of the day, scalping could be the way to go. If you like doing research or the idea of trading on news or major technical levels you might want to do less trades and focus on long term styles of trading. (Let's take an interactive look at equity research with The Changing Role Of Equity Research.)
You may also like the idea of finding a medium; not holding positions all day but not entering and exiting every few seconds or minutes either. You take part in the major part of a move, normally once it is already in motion (you can still do your research to find out where these moves might take place) and then exit as soon as it looks like the momentum may slow or shift. With this style of trading you may make up to several trades within the day depending on market movements.
Also, all traders have different restrictions or circumstances that will almost force them (at least temporarily) into one style or another, and scalping will generally not be the desired approach. Scalping requires extremely low brokerage fees as the trader will have to make many trades, mostly for a small profit and many may end up with many flat trades minus trade costs, thus resulting in a cumulative net loss. So unless traders can get their costs per trade down to a very low level, they may want to put scalping on hold. Most traders starting out will need to do fewer trades to control their fees, but they will attempt to make more profit on each trade. This will entail doing research on what stocks will move the next day, scanning for stocks that have hit, or are about to hit major technical levels, or stocks that will move based on economic data, news or other market driving force. Traders also have other commitments, sometimes other jobs, or family. The amount of trades being done should be congruent with other lifestyle choices. (To read more about different types of trading strategies, refer to Introduction To Types Of Trading: Swing Traders.)
Under or Overtrading
Next, a trader needs to be able see if he or she is under or overtrading. In other words, is the trader giving up potential profits because they are not willing to enter a position when they see an opportunity, or are they wasting money racking up excessive fees? If a trader is under-trading he or she will probably end up saying things like "My trading plan says I should get in, and I didn't!" or "Why didn't I make that trade?" This is a clear sign of undertrading.
Overtrading can be harder to pinpoint, but if the trader is consistently only making a couple of dollars above commissions, or is making random trades with untested methods, then he is likely overtrading. Another sign to look for is exiting too early in a profitable move, or placing stops too close to the entry price which pre-maturely exits the trader from a would-be profitable position. These will lead to increased trades and increased trading costs.
In both cases, the trader needs to structure a trading plan in such a way that will pull them away from these tendencies. (It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself Ten Steps to Building a Winning Trading Plan.)
Use a Trading Plan
Every trader should have a trading plan. Entry and exit from stocks should not be random; there should be a reason behind each trade supported by the trading plan. Chances are, if a trader is overtrading or undertrading and a plan is in place, that plan needs tweaking. If they are overtrading they may need to make their entry and exit criteria more stringent or harder for the market to manufacture valid signals. When we add more criteria that need to be in place for a trade to happen, we will do fewer trades but chances are those trades will be more consistent and more profitable - although this is never a guarantee.
If a trader is undertrading, it is likely that there is no trading plan in place and he is just watching a stock and missing opportunities. If they do have a plan, their current criteria for entering a trade is likely too restrictive. If a plan does not allow the trader to capitalize on major movements it should be adjusted so they can take part in these moves.
Do not cut off valid market opportunities because of a fear of losing. Develop a plan of attack for the markets; what needs to happen in order for you to enter a trade, and also what needs to happen for you to get out of a position? (Learn more in Day Trading Strategies For Beginners.)
Summary
All traders regardless of how often they trade should have a trading plan. After the trading plan is in place we need to do a self-assessment of if we are over or under trading within our plan. Based on these results we can alter our trading plan to suit our needs and likely increase our profitability. If we are overtrading, we can make our trading plan more restrictive for entries and exits. If we are under-trading, we can relax our trading plan criteria to take advantage of potentially profitable moves in the market.
One thing that all traders will eventually need to consider is how much should be traded. Will they make one trade per day, 100 or more? While how much to trade may just happen naturally, every trader should stop and evaluate how much they are trading and if they are possibly under or overtrading their specific style or system. Scalping styles generally require lots of trades, while positions traders need to be more selective in the movements the trade. Each style is different, and too many or too few trades could potentially harm a trader's profits.
Learn a Little About Yourself
The first thing you need to decide is what kind of trading you like to do. If having to watch every tick of the ticker and every change in the quotes would drive you crazy, chances are you don't want to be a scalper. If you like the high pace and being highly involved in the market every second of the day, scalping could be the way to go. If you like doing research or the idea of trading on news or major technical levels you might want to do less trades and focus on long term styles of trading. (Let's take an interactive look at equity research with The Changing Role Of Equity Research.)
You may also like the idea of finding a medium; not holding positions all day but not entering and exiting every few seconds or minutes either. You take part in the major part of a move, normally once it is already in motion (you can still do your research to find out where these moves might take place) and then exit as soon as it looks like the momentum may slow or shift. With this style of trading you may make up to several trades within the day depending on market movements.
Also, all traders have different restrictions or circumstances that will almost force them (at least temporarily) into one style or another, and scalping will generally not be the desired approach. Scalping requires extremely low brokerage fees as the trader will have to make many trades, mostly for a small profit and many may end up with many flat trades minus trade costs, thus resulting in a cumulative net loss. So unless traders can get their costs per trade down to a very low level, they may want to put scalping on hold. Most traders starting out will need to do fewer trades to control their fees, but they will attempt to make more profit on each trade. This will entail doing research on what stocks will move the next day, scanning for stocks that have hit, or are about to hit major technical levels, or stocks that will move based on economic data, news or other market driving force. Traders also have other commitments, sometimes other jobs, or family. The amount of trades being done should be congruent with other lifestyle choices. (To read more about different types of trading strategies, refer to Introduction To Types Of Trading: Swing Traders.)
Under or Overtrading
Next, a trader needs to be able see if he or she is under or overtrading. In other words, is the trader giving up potential profits because they are not willing to enter a position when they see an opportunity, or are they wasting money racking up excessive fees? If a trader is under-trading he or she will probably end up saying things like "My trading plan says I should get in, and I didn't!" or "Why didn't I make that trade?" This is a clear sign of undertrading.
Overtrading can be harder to pinpoint, but if the trader is consistently only making a couple of dollars above commissions, or is making random trades with untested methods, then he is likely overtrading. Another sign to look for is exiting too early in a profitable move, or placing stops too close to the entry price which pre-maturely exits the trader from a would-be profitable position. These will lead to increased trades and increased trading costs.
In both cases, the trader needs to structure a trading plan in such a way that will pull them away from these tendencies. (It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself Ten Steps to Building a Winning Trading Plan.)
Use a Trading Plan
Every trader should have a trading plan. Entry and exit from stocks should not be random; there should be a reason behind each trade supported by the trading plan. Chances are, if a trader is overtrading or undertrading and a plan is in place, that plan needs tweaking. If they are overtrading they may need to make their entry and exit criteria more stringent or harder for the market to manufacture valid signals. When we add more criteria that need to be in place for a trade to happen, we will do fewer trades but chances are those trades will be more consistent and more profitable - although this is never a guarantee.
If a trader is undertrading, it is likely that there is no trading plan in place and he is just watching a stock and missing opportunities. If they do have a plan, their current criteria for entering a trade is likely too restrictive. If a plan does not allow the trader to capitalize on major movements it should be adjusted so they can take part in these moves.
Do not cut off valid market opportunities because of a fear of losing. Develop a plan of attack for the markets; what needs to happen in order for you to enter a trade, and also what needs to happen for you to get out of a position? (Learn more in Day Trading Strategies For Beginners.)
Summary
All traders regardless of how often they trade should have a trading plan. After the trading plan is in place we need to do a self-assessment of if we are over or under trading within our plan. Based on these results we can alter our trading plan to suit our needs and likely increase our profitability. If we are overtrading, we can make our trading plan more restrictive for entries and exits. If we are under-trading, we can relax our trading plan criteria to take advantage of potentially profitable moves in the market.
The Importance Of Trading Psychology And Discipline
Trading Psychology
The psychological aspect of trading is extremely important, and the reason for that is fairly simple: A trader is often darting in and out of stocks on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with previously established trading plans and know when to book profits and losses. Emotions simply can't get in the way. (To read more about trading psychology, see Master Your Trading Mindtraps or discuss at Trading Psychology forum.)
Understanding FearWhen a trader's screen is pulsating red (a sign that stocks are down) and bad news comes about a certain stock or the general market, it's not uncommon for the trader to get scared. When this happens, they may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. Now, if they do that they may avoid certain losses - but they also will miss out on the gains.
Traders need to understand what fear is - simply a natural reaction to what they perceive as a threat (in this case perhaps to their profit or money-making potential). Quantifying the fear might help. Or that they may be able to better deal with fear by pondering what they are afraid of, and why they are afraid of it.
Also, by pondering this issue ahead of time and knowing how they may instinctively react to or perceive certain things, a trader can hope to isolate and identify those feelings during a trading session, and then try to focus on moving past the emotion. Of course this may not be easy, and may take practice, but it's necessary to the health of an investor's portfolio. (For more, see Understanding Investor Behavior.)
Greed Is Your Worst EnemyThere's an old saying on Wall Street that "pigs get slaughtered." This greed in investors causes them to hang on to winning positions too long, trying to get every last tick. This trait can be devastating to returns because the trader is always running the risk of getting whipsawed or blown out of a position.
Greed is not easy to overcome. That's because within many of us there seems to be an instinct to always try to do better, to try to get just a little more. A trader should recognize this instinct if it is present, and develop trade plans based upon rational business decisions, not on what amounts to an emotional whim or potentially harmful instinct. (Keep reading about this in When Fear And Greed Take Over.)
The Importance of Trading RulesTo get their heads in the right place before they feel the emotional or psychological crunch, investors can look at creating trading rules ahead of time. Traders can establish limits where they lay out guidelines based on their risk-reward relationship for when they will exit a trade - regardless of emotions. For example, if a stock is trading at $10/share, the trader might choose to get out at $10.25, or at $9.75 to put a stop loss or stop limit in and bail.
Of course, establishing price targets might not be the only rule. For example, the trader might say if certain news, such as specific positive or negative earnings or macroeconomic news, comes out, then he or she will buy (or sell) a security. Also, if it becomes apparent that a large buyer or seller enters the market, the trader might want to get out.
Traders might also consider setting limits on the amount they win or lose in a day. In other words, if they reap an $X profit, they're done for the day, or if they lose $Y they fold up their tent and go home. This works for investors because sometimes it is better to just "go on take the money and run," like the old Steve Miller song suggests even when those two birds in the tree look better than the one in your hand. (For more, see Removing The Barriers To Successful Investing.)
Creating a Trading PlanTraders should try to learn about their area of interest as much as possible. For example, if the trader deals heavily and is interested in telecommunications stocks, it makes sense for him or her to become knowledgeable about that business. Similarly, if he or she trades heavily in energy stocks, it's fairly logical to want to become well versed in that arena.
To do this, start by formulating a plan to educate yourself. If possible, go to trading seminars and attend sell-side conferences. Also, it makes sense to plan out and devote as much time as possible to the research process. That means studying charts, speaking with management (if applicable), reading trade journals or doing other background work (such as macroeconomic analysis or industry analysis) so that when the trading session starts the trader is up to speed. A wealth of knowledge could help the trader overcome fear issues in itself, so it's a handy tool.
In addition, it's important that the trader consider experimenting with new things from time to time. For example, consider using options to mitigate risk, or set stop losses at a different place. One of the best ways a trader can learn is by experimenting - within reason. This experience may also help reduce emotional influences.
Finally, traders should periodically review and assess their performance. This means not only should they review their returns and their individual positions, but also how they prepared for a trading session, how up-to-date they are on the markets and how they're progressing in terms of ongoing education, among other things. This periodic assessment can help the trader correct mistakes, which may help enhance their overall returns. It may also help them to maintain the right mindset and help them to be psychologically prepared to do business. (For more, see Ten Steps To Building A Winning Trading Plan.)
Bottom Line
It's often important for a trader to be able to read a chart and have the right technology so that their trades get executed, but there is often a psychological component to trading that shouldn't be overlooked. Setting trading rules, building a trading plan, doing research and getting experience are all simple steps that can help a trader overcome these little mind matters.
Trading Psychology
The psychological aspect of trading is extremely important, and the reason for that is fairly simple: A trader is often darting in and out of stocks on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with previously established trading plans and know when to book profits and losses. Emotions simply can't get in the way. (To read more about trading psychology, see Master Your Trading Mindtraps or discuss at Trading Psychology forum.)
Understanding FearWhen a trader's screen is pulsating red (a sign that stocks are down) and bad news comes about a certain stock or the general market, it's not uncommon for the trader to get scared. When this happens, they may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. Now, if they do that they may avoid certain losses - but they also will miss out on the gains.
Traders need to understand what fear is - simply a natural reaction to what they perceive as a threat (in this case perhaps to their profit or money-making potential). Quantifying the fear might help. Or that they may be able to better deal with fear by pondering what they are afraid of, and why they are afraid of it.
Also, by pondering this issue ahead of time and knowing how they may instinctively react to or perceive certain things, a trader can hope to isolate and identify those feelings during a trading session, and then try to focus on moving past the emotion. Of course this may not be easy, and may take practice, but it's necessary to the health of an investor's portfolio. (For more, see Understanding Investor Behavior.)
Greed Is Your Worst EnemyThere's an old saying on Wall Street that "pigs get slaughtered." This greed in investors causes them to hang on to winning positions too long, trying to get every last tick. This trait can be devastating to returns because the trader is always running the risk of getting whipsawed or blown out of a position.
Greed is not easy to overcome. That's because within many of us there seems to be an instinct to always try to do better, to try to get just a little more. A trader should recognize this instinct if it is present, and develop trade plans based upon rational business decisions, not on what amounts to an emotional whim or potentially harmful instinct. (Keep reading about this in When Fear And Greed Take Over.)
The Importance of Trading RulesTo get their heads in the right place before they feel the emotional or psychological crunch, investors can look at creating trading rules ahead of time. Traders can establish limits where they lay out guidelines based on their risk-reward relationship for when they will exit a trade - regardless of emotions. For example, if a stock is trading at $10/share, the trader might choose to get out at $10.25, or at $9.75 to put a stop loss or stop limit in and bail.
Of course, establishing price targets might not be the only rule. For example, the trader might say if certain news, such as specific positive or negative earnings or macroeconomic news, comes out, then he or she will buy (or sell) a security. Also, if it becomes apparent that a large buyer or seller enters the market, the trader might want to get out.
Traders might also consider setting limits on the amount they win or lose in a day. In other words, if they reap an $X profit, they're done for the day, or if they lose $Y they fold up their tent and go home. This works for investors because sometimes it is better to just "go on take the money and run," like the old Steve Miller song suggests even when those two birds in the tree look better than the one in your hand. (For more, see Removing The Barriers To Successful Investing.)
Creating a Trading PlanTraders should try to learn about their area of interest as much as possible. For example, if the trader deals heavily and is interested in telecommunications stocks, it makes sense for him or her to become knowledgeable about that business. Similarly, if he or she trades heavily in energy stocks, it's fairly logical to want to become well versed in that arena.
To do this, start by formulating a plan to educate yourself. If possible, go to trading seminars and attend sell-side conferences. Also, it makes sense to plan out and devote as much time as possible to the research process. That means studying charts, speaking with management (if applicable), reading trade journals or doing other background work (such as macroeconomic analysis or industry analysis) so that when the trading session starts the trader is up to speed. A wealth of knowledge could help the trader overcome fear issues in itself, so it's a handy tool.
In addition, it's important that the trader consider experimenting with new things from time to time. For example, consider using options to mitigate risk, or set stop losses at a different place. One of the best ways a trader can learn is by experimenting - within reason. This experience may also help reduce emotional influences.
Finally, traders should periodically review and assess their performance. This means not only should they review their returns and their individual positions, but also how they prepared for a trading session, how up-to-date they are on the markets and how they're progressing in terms of ongoing education, among other things. This periodic assessment can help the trader correct mistakes, which may help enhance their overall returns. It may also help them to maintain the right mindset and help them to be psychologically prepared to do business. (For more, see Ten Steps To Building A Winning Trading Plan.)
Bottom Line
It's often important for a trader to be able to read a chart and have the right technology so that their trades get executed, but there is often a psychological component to trading that shouldn't be overlooked. Setting trading rules, building a trading plan, doing research and getting experience are all simple steps that can help a trader overcome these little mind matters.
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