Dave Mabe, who has developed the excellent StockTickr service, asks the question on his blog: Which trading mistake is worse?
a) Taking bad trades
b) Failing to take good trades
Psychologically, these are very different mistakes. Taking bad trades (overtrading) is most often a function of overconfidence, frustration, or sheer impulsivity. It represents a relative absence of control.
Failing to take good trades, on the other hand, can be viewed as an overcontrolled behavior pattern. Anxiety and a lack of confidence are common reasons for not taking trades with an edge.
Many traders cycle between these modes: They become overaggressive, take bad trades, undergo losses, and then become overly risk averse and fail to take good trades. This is a deadly cycle, both emotionally and financially.
So which is worse? Neither: as we can see with those traders that cycle between the two, they're variations of the same trading problem--a loss of rule-governance. When we become emotionally stimulated--whether with anger or anxiety--we are apt to act in flight (don't take the trade) or fight (take any trade) mode. We no longer stay connected to trading rules and sound practices.
Neither mistake need be deadly if it becomes a cue to observe yourself and figure out why you are veering from your rules. Trading mistakes can be opportunities for self-analysis if you're able to catch yourself and enter a reflective mode. That is why I like to take a time out when I'm getting away from my goals and rules. We can't undo mistakes, but we can turn them into learning experiences.
Why Traders Lose Discipline