Monday, September 01, 2014

Are Discipline and Patience the Cure for Overtrading?

A while back, a post explained why quiet markets reveal the best traders.  Quiet markets require patience, as they offer less directional opportunity.  For competitive traders eager to make money, that can be bitter.  Recall the group of 11 studies that documented how people have difficulty spending just 6-15 minutes by themselves with nothing to do.  Given a choice between doing something that caused pain to themselves and doing nothing, many of the subjects in the studies elected the painful activity.  It seems as though some action is psychologically preferable to none for many people.

It's not surprising then that quiet markets invite overtrading.  Sitting, staring at screens, and following markets tick by tick without actively trading is exceedingly difficult for many people.  The more successful traders step back from screens and engage in other aspects of trading process:  research and idea generation, performance review, etc.  The less successful traders convince themselves that they see directional patterns setting up in the tick by tick action and, in common parlance, "get chopped up."

What is equally difficult for many traders is the patience required to let trades work out.  This is what traders commonly call "the pain of gain":  restraining oneself from taking profits too early in trades that have not yet reached their targets.  To sit still while market gyrate invites the fear of missing opportunity.  To not act while trades are working invites the fear of reversal.  Both forms of non-action place traders in the situation faced by the subjects in the above studies.  

Many so-called problems of discipline in trading boil down to the lack of ability to tolerate inaction.  Traders do the wrong thing because they feel the need to do some thing--and they act that need out in markets.  

I do know quite a few traders who do not have this problem.  They are only too happy to step back from markets and allow ideas to work out.  Almost to a person, these traders are immersed in idea generation and the search for opportunity.  They are happy to step back from markets because they are stepping toward something they enjoy more than risk-taking:  the creative process of discovery.  

If what excites you about trading is risk/reward and making money, it's not surprising that quiet markets will be noxious ones.  If what excites you about trading is the puzzle-solving of uncovering opportunity, quiet markets become opportunities to do what you love best.

As long as there are things in life that call you more strongly than trading profits, no discipline and patience are needed to avoid overtrading.  If you're looking to get rich from markets, it helps to have a wealth of interests outside of them.

Further Reading:  How Do I Avoid Overtrading?