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One of the most common trading mistakes when you’re starting out, (apart from poor risk management), is over-trading. This can happen by taking trades that aren’t there, or trading more instruments than your account can handle. Or simply, as the casino would call it, going ‘on tilt’, trying to get revenge on the market for taking your money.
What causes over-trading?
In my experience, it stems from three main beliefs:
- Trading only happens when you click the buy/sell button. This is a misconception. Analyzing charts for potential trades, even if you don’t find any, is part of trading. So is journaling your ideas and strategies. Choosing not to trade because there’s no trade to take, is also a valid trading decision.
- The desire to make a lot of money quickly. We all enter the market with the goal of making money, but there’s a truth to the adage: “It takes money to make money.” Over-trading to achieve quick profits can lead to risking more capital than you should. This increases the chance of a significant loss that could wipe out your account, and prevent you from taking any trades at all.
- Personalizing the market – as a byproduct of over-trading and losing. Here, it feels like you’re in a battle with a human, not the market. The market is enormous, and it’s a battle you really cannot win.
Solution
The solution to this problem, I found, is understanding and realigning your goals to focus on your competence as a trader, and not on your money goals. Perhaps more importantly, your goal should be to keep as much of your money for as long as possible.
To achieve this, my advice would be to select a single market and a single instrument for your next 50 -100 trades (at least). If you don’t have your own strategy/system that works, then adopt a mechanical system that’s been tested from another successful trader and focus on execution. Focus just on execution. If the system is good it will avoid a lot of trades – a good system is exclusionary by design.
In closing
Trading is an all-encompassing endeavour. It isn’t only placing and taking off trades, as there’s plenty that needs to happen in between. Remember: Not being in a trade is a trade.
But most importantly, by protecting your capital you protect your mental capital. And that’s more important than making money.
Traders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.
Njabulo Nsibande is a founder of Village Trader, and Sakha Ingcebo investment club. His interest in trading began in 2016, alongside a rash of Instagram ‘fx traders’…
Find him on Twitter: @njabulo_goje.
