Many retail traders with little capital often exceed the risk limits and open too big orders hoping that they could live by trading. This is sometimes a part of their trading plan actually…
This is what we call overtrading – it is the simplest way to losses and/or burning down your account even amongst the most experienced traders.
Therefore if you eliminate the possibility of overtrading (i.e. by a proper construction of your trading plan) – you will minimize the possibility of experiencing losses. This is applicable throughout your entire career as a trader!
Overtrading has two aspects:
Unjustifiable large amount of opening orders.
Large number of hours in front of the screen.
As the research show, most of the problems in trading comes from those two reasons. The third reason is opening too large trades compared to the capital trader has got. I will talk about that later on.
Too many hours in front of the screen can weaken you intellectually (so your ability of proper analysis of the market and consciousness gets lowered drastically) and emotionally (when there is nothing going on, there is a pressure to do anything, even if it makes no sense).
High number of entries, especially made by beginners, create highly stressful situations, that result in impairment of concentration and proper analysis.
Overtrading leads to both mental and emotional exhaustion, and the worst case scenario – it leads to a trauma.
The belief that emotions are a main source of problems in trading is a … myth.
The whole thing is the other way around: overtrading causes emotions, and those lead to wrong decisions.
After some time trader is trapped: wrong decisions cause emotions and those cause other wrong decisions. Losses are inevitable then.
Emotions are a consequence of faults in trading, not the reason. If you want to eliminate emotions, eliminate possibilities of overtrading and you will eliminate the reason.
The second myth is a quite common idea that only losses cause bad emotions. That’s not true – emotions caused by high profits are even more dangerous. This is because euphoria blinds us, it makes us feel that we are invincible. The feeling itself is quite pleasant, but it makes us forget about our market analysis (well, we know everything about the market, right?) and we start opening too large positions.
Good decisions are being made when we are fresh and after a good night sleep, and the level of our emotions is low or moderate.
May 20, 2017 at 11:49AM