Thursday, March 18, 2010

One Reason That Traders Overtrade

So far, we're trading in a seven point trading range today. My earlier posts today have highlighted some trading ideas derived from the range day structure; a nimble trader had a few opportunities to buy below VWAP and sell above.

Given the narrow range, however, each trade has only been good for a relatively small move.

That's a big part of what leads traders to overtrade. If their account sizes are modest, they cannot make as much from small moves as they would like. If they are hoping to make a living from trading a small account, the small moves will be more like frustrations than the good trades that they are.

So, unable to trade larger, they trade more often.

They try to catch ever smaller swings--or they talk themselves into anticipating breakouts that never materialize.

Their problem is not just a trading problem; it's a psychological one: their expectations are unrealistic relative to their account sizes and relative to market volatility.

If you feel that you *need* to get market movement, you'll trade to make that happen--either by vainly playing for breakouts or by trading ever-smaller "setups". Trading expectations that reflect your needs--and not the realities of how markets are trading--is a formula for disappointment.