If you were to look at the trading account history of most unsuccessful traders the first thing you would probably notice is a large amount of trade executions. Conversely, if you look at the trading history of most consistently successful traders you will probably notice significantly fewer trades were executed over the same period of time than their unsuccessful counterparts.
The “snow-ball” effect of over-trading
If you’ve been around the markets for any length of time you’ve probably experienced the snow-ball effect of over-trading. What I mean is this; you enter one trade that you know you should not enter, but for some reason you do anyways, or perhaps you risk too much on one trade because you think it looks like it “can’t lose”. Next, you lose on the trade that you entered on a whim or that you loaded up on. Once this happens it’s nearly impossible for most traders to leave their computers and not trade again. What usually ends up happening is that the trader commits a “revenge trade” and tries to make back the money they just lost because they know they traded for a stupid reason or risked too much.
However, this revenge trade almost always leads to more emotional trading, and this pattern will typically fuel itself until the trader has lost so much money they are forced to stop trading. The point is that it’s a very slippery slope once you start over-trading, and one emotional trade can literally become an avalanche of over-trading if you are not careful. This is why it’s extremely important to always trade in a disciplined and calm manner; every time you enter a trade you should ask yourself if it meets your trade plan criteria or if you are acting emotionally.
NOT TRADING is a profitable position!
Another thing you are likely to notice if you look at any consistently successful trader’s trading history, is that they likely have longer periods of time than you might expect without entering any trades. This is because successful traders know that not being in the market can be a very profitable position and is more often than not the BEST position to be in.
Consider this point, if you lose money because you over-traded, your trading account now has significantly less money than it did before you over –traded. Thus, if you consider point A your trading account value before over-trading, and point B your trading account value after over-trading, you have more money in your account at point A, thus by simply NOT being in the market you are further ahead than if you had over-traded. So, the point is that not trading can actually be a very lucrative thing to do if it means you are avoiding frivolous trades.
Successful traders know exactly what they are looking for in the markets
When you know exactly what you are looking for in the markets you are far less likely to over-trade. This is because when you know precisely what you want the market to look like before you enter you will have only yourself to blame if you enter the market at any other time. Many unsuccessful traders do not have an effective trading strategy mastered and as a result of this they end up trading what they think instead of what they see.
You can stare at a price chart and add indicators to it and make up a nearly unlimited number of reasons for why you could jump in the market at any given time. However, just because you CAN trade at any time certainly does not mean that you SHOULD. The most successful traders trade simple trading strategies that can easily be explained to other people who know nothing about the markets. These successful traders then combine their simple yet effective trading strategies with intense discipline to follow their trade plans, manage risk, and follow the 7 pillars of success.
If you are currently losing money in the markets, try this…
If you are currently losing more money than you are making in the markets you will probably find that if you just trade less frequently you will do much better. This will allow you to figure out EXACTLY what you are looking for in the markets so that you don’t “make up” trading signals that aren’t truly a high-probability edge. So, in effect, you reduce the quantity of trades that you take but you increase the quality of them. In the world of trading, any time we can reduce confusion and emotion we put ourselves in a very good position to make money consistently.