Ever say to yourself, "What made me take that trade?" I think we all have, and there's also a good chance you did what can be described as over-trading. The symptoms of this deadly disease can be put in two categories: 

1. Trading too much

2. Taking on too large a position

I'm going to assume traders reading this are smart enough to have a strategy. Having a strategy is crucial to meeting goals and avoiding unwanted trades. Whether your style is scalping or intermediate-term, this lesson will help identify the psychological causes behind making those trades you never should have.

There are three main causes of over-trading:

• The first cause is carelessness or feeling lucky. This is common in traders who become complacent with their profits and step outside their strategy because they feel they can't go wrong. Winning is what it's all about, but taking on too large a position or taking more positions just for the fun of it is a great way to land flat on your face with a big loss. A trader may see him or her self as being aggressive, but in fact they are just being reckless. Many traders who have been in this business a long time realize that discipline is the key to consistent performance. As traders, most of us only have ourselves to answer to, and it's often very tempting to let one fly on a whim; but is that really any different than gambling? 
  

• The second cause of over-trading comes when a trader tries to go for revenge after taking a loss. It’s only natural to feel the need for payback when you’ve had your position cut down in size. The mistake people make is when they say things like “I gotta get it back today,” or “this market’s not beating me." Acting on emotions like these often gets traders into positions they should never take. I’ve made this mistake before: Time ago I had a position in Grey Wolf (GW | Quote | Chart | News | PowerRating) with a reasonable stop loss  just under my entry point. The stock was gently moving higher through the day. Then, while I wasn't watching, the price dropped, touched my stop loss, and cruised ever higher for the day, leaving me behind. I took it very personal and tried to play catch-up but only ended up losing more. I'm still angry about it, but I've also learned a lesson. Strategy is king, and reasons to trade outside of strategy have no place in my program. Revenge is no reason to enter a trade, pure and simple.
  

• The third cause of over-trading comes with the belief that you must be trading to be succeeding. Beginning traders can have a difficult time grasping the concept of patience. This isn’t a profession where the more you hack away, the more you succeed. I think of it like baseball -- you must wait until you see the right pitch. Swinging for the fences or going for the long shots are not good ways to be consistent. The idea is to avoid risk by taking positions that you know are most likely to succeed. Striking out too many times in the world of trading could have you filing for Chapter 11. Discount brokers have done a great thing by lowering commissions, but don’t see it as an invitation to load up on more trades. A better way to expend energy would be to look for more setups.

So What’s the Cure for Over-Trading?

The best thing you can do to avoid the trap of overtrading is to keep a journal. By recording all of your entries and exits, and more importantly why you made your decisions, you will be able to identify your strengths and weaknesses and stay honest with yourself.

For example, if during the day you find yourself complacent with a nice pile of winnings, then "for the hell of it," you decide you can afford to play the other side of the market, you would have to record that in a journal. Hopefully, the action of recording that decision alone would be reason enough not to do it again. Of course if a trade based on an emotional decision works out, you will want to see if there were any technical conditions you could use to do it again -- though emotions alone have no place in a strategy, and I'm sure you'll be less tempted to trade that way when you see how ineffective it can be.

Your journal could be anything from a simple notebook to a statistic-laden data platform. I like to print my charts out so I can mark exactly where the entry and exit points were. Beneath the chart I write specifically why I made my decisions. I am happy to say that after I started doing this, I no longer make any decisions for reasons outside my strategy. I've also found that it's the mistakes that you learn from, not the successes. By eliminating bad habits -- one by one -- you can fine-tune yourself into a lean, mean, trading machine.

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