Tuesday, March 31, 2015

Eliminating Overtrading

One of the keys to trading more successfully has been to eliminate overtrading.  That is trading for a short-term intraday moves.  I have come to realize that overall, they are a net negative to my trading results.  It is hard to do nothing and just be in front of the computer with a mouse click away from buying or selling.  But I've the most success just taking a position and holding it, giving it time for a move to develop.

There have been too many times in the past where I have focused on making daytrades at the expense of missing a longer term trading opportunity.  Now my main focus is to seize those longer term trading opportunities, and not waste mental energy on the intraday squiggles.  It is easy to get caught up in the intraday movements and imagine all the points that you could have made if you bought at this price and sold it 30 minutes/1 hour later, etc.  It is a mental trap that sucks traders into short-term thinking, and blurs out the big picture view.

For example, if I was bullishly inclined about the S&P 500 (I am not), I could have viewed the dip in the middle of last week as a buying opportunity, maybe not intraday, but certaintly for a swing trade into the beginning of April.  Even if I thought the market could go lower the next hour, or the next day, just by having a longer term view lets you take a position at a favorable price level and just ride it out without worrying about the short-term fluctuations.  The big money is made in the sitting, not in the day-to-day hour-to-hour trading.

It is hubris to think that you can predict how a stock/index will perform in the next hour, the next day, or the next week to perfection.  All you can do is to try to put the odds in your favor, and let the trade develop.  This will result in winners turning into losers, which really pains the psyche, but also let losers turn into winners, or more commonly, let small winners turn into medium to large size winners.

It is hard to compete with the HFT front running/scalping, the bid ask spreads that add up quickly when daytrading.  The edge for a discretionary trader like me is to take adavantage of the short-term nature of these HFTs which will push prices beyond their natural supply/demand levels, to get good entry points.

After yesterday's rally cooled the nerves of traders, it should be a quiet day today.  I see little edge on either side.  Just by looking at the lesser activity of speculative stocks, the animal spirits are notably absent since the beginning of March.  There is nothing to be excited about in the markets, and the speculators seem to agree.

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