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2024/06
Overtrading? Here's the key to strategic trading
Overtrading and micromanagement plague many traders, often being significant reasons for their failure. However, in trading, only a few truly understand why they overtrade, and even fewer know how to break the habit of overtrading.
This article will delve into common issues many traders encounter and how you can address the problems caused by overtrading or micromanagement, understanding how to become a trader who trades less but trades better.
The "80/20 Rule" in Trading
The Pareto Principle, also known as the “80/20 Rule,” states that 80% of results come from 20% of efforts. This principle applies to various aspects of trading, emphasizing the importance of critical factors in determining trading performance.
To grasp these key factors, traders should create and manage a watchlist, set price alerts at crucial levels, record each trade, evaluate trades, and establish rules and guidelines within their trading strategy.
Furthermore, traders should refrain from non-value-adding or time-consuming activities, such as observing price movements or seeking trading signals without proper preparation, constantly monitoring trades, searching for better trading methods on forums or social media, or excessively trading due to screen fixation.
Overtrading vs Set and Forget
Overtrading is a fatal weakness for most traders. It manifests in various ways, such as constantly monitoring orders, switching to smaller timeframes during trades, seeking irrelevant information to validate trades, frequently adjusting stop-loss and profit targets, opening or closing positions without a plan, or spending excessive time checking closed trades.
“Set and forget” is the opposite approach to overtrading. After conducting analysis and entering a trade, set stop-loss and profit targets, then leave the trade alone. Avoid monitoring price movements; wait for prices to reach profit targets or stop-loss levels. This eliminates the need for frequent manual trade management.
Adopting the “set and forget” approach can improve trading performance. When traders cease overtrading, their trading results often improve. The difficulty in overcoming the habit of overtrading lies in traders’ need for faith in their trading systems. These traders focus solely on making money without verifying the superiority of their trading systems or establishing any trading rules.
Boredom and Poor Decision-Making
While observing price movements can be beneficial if traders know what they are looking for, the market’s volatility makes it unpredictable. Browsing timeframes and capturing trading signals with a clear strategy will succeed.
Prolonged screen time often leads to boredom, a dangerous emotion that can result in poor trading decisions. Establishing a better trading workflow and eliminating boredom involves analyzing markets and devising trading plans on Sundays, identifying key price levels for the upcoming week, setting price alerts, and then refraining from monitoring the market until alerts trigger or critical levels are reached. To avoid disrupting trades, adopt the “set and forget” method.
Controlling Trading Desires
Understanding the conditions under which a trading system is advantageous is essential for successful trading. Traders must exercise restraint and only enter trades when the system signals an opportunity. Adhering to a strategy and focusing on making one successful trade per week can lead to success.
Trading is a pattern recognition game requiring a systematic approach to minimize errors. Before initiating a high-potential trade, traders can create a checklist based on past experiences to prevent overlooking details, ensuring more transparent decision-making and better execution.
Moreover, traders should prioritize events and refrain from overtrading. Stepping away from the market during complex market conditions is crucial to outstanding performance. Traders should understand that “less trading, better trading” – in other words, not trading is sometimes more important than trading.
