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Make more money by trading less

Someone recently asked me:

​"Can you remember what it was like when you took your first ever trade and what has changed since then?"

It was a thought provoking question and something I had never really fully considered and looked into in detail.

So out of curiosity I went back through my trading records and had a look.

Now, to say that I was astounded by how many positions I was trading at any one time, is an understatement, but the one thing that really blew me away was that it hadn't translated into higher gains.

So in this article I'm going to take you through the steps I went through that got me to where I am now....trading a lot less, but making more money! 

We'll explore how my naivety and greed influenced my thinking. Look at the emotions that I experienced when it all went wrong and how I finally realized that I was my own worse enemy, and that something had to change.

Thrills and Invincibility

Thrill

So we'll start with my first ever trade.

From memory it was a small company, I forget the name of it now, but it was one of the darlings of the oil sector at the time.

For a while I had follow​ed and charted their stock. Read as many books on trading as I could lay my hands on, confirmed my own thoughts with others traders on various forums and finally decided to jump in and buy.

​I was ready to conquer the markets and make my millions (or so I thought).

For a complete novice with really no idea of what I was doing, I actually managed to do quite well for a while.

I did everything I had read up on and learnt. I was disciplined with my entries and exits. Took profits when I should, had my stops in place (though I hadn't actually had to act on any yet).

Before long I began developing that sense of invincibility that creeps in when you feel that you can do no wrong.

​I became totally caught up in the sheer thrill of trading. I even deluded myself into thinking at one point that I was somehow in synch with the market. I'd check my portfolio at least 10 times a day.

I had seriously let the thrill and excitement of trading, completely take control of me!

​Giving into Greed

greed

​What I didn't realize back then, but I can see now, was that greed and irrational exuberance were dramatically influencing my decisions. I can remember how I'd feel uneasy and almost a bit annoyed if I had any money sitting in my account and it wasn't invested in the market.

I viewed it as lazy money, sitting idle, doing nothing. It had to be working hard for me constantly, increasing my profits.

Because of this "be in the market all the time" mindset, I was of course looking for more and more stocks I could trade.

The logic behind this was that if I was doing well with only a couple of trades. Then Surely increasing the amount of trades and money I had in the market would make me a heap more money in a shorter amount of time?

I was after all (in my own mind) Mr Super Trader, what could possibly go wrong?

Well... frankly, everything! It all started going wrong pretty quickly.

The markets unknown to me, were about to experience a large correction and here I was, fully invested and long in multiple positions. I was totally naive to the "financial tsunami" that was about to wreak havoc on my trading account.

Pretty soon everything I thought I had learned in the numerous books I had read, went out of the window!

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Riding the Emotional Roller Coaster​

rollercoaster

There are 4 key emotions, that I covered in this previous post, that control our thinking when we trade the markets.

Fear was of course the first emotion to arrive on the scene and torment me. My trading screen had pretty quickly turned into a sea of red and I was basically sitting there totally paralysed by fear and indecision.

I started rationalising to myself why I shouldn't exit. Started telling myself this was just a temporary glitch and that prices would be back on their upward journey again soon. By this time I had also convinced myself that some of my trades, now deep in the red, would be longer term investments.

Then I did what any self respecting amateur trader would do in this situation. 

​I ignored my stop losses.

Which was a course something that I regretted as soon as I did it.

Over the next few days the losses got even worse. By now I wasn't sleeping well at night and I felt sick in the stomach every time I looked at my account balance. More wrong decisions of course followed and I moved onto stage 2 of maximum loss creation.

I started averaging down.

I started buying into the falling trend grabbing more stock at lower prices, which of course just compounded my problems.

I broke every rule I had put in place.

Eventually, faced with mounting losses and overwhelming anxiety and fear. I reached a point where I realised I had to save at least some of my capital... and I sold!

I took some pretty big losses over those few days.

I sat dejected, cursing the market for what it had done to me, blaming everyone and everything for what had happened. But it wasn't the money I had lost that was playing on my mind.

It was the fact that I had lost control of the situation.

Why had I not acted on my stops?

Why had I taken so many trades at the wrong time?

The real problem, which I could see now and hadn't realized before, was that my greed, and the sheer thrill of winning, as it does with so many novice traders, had led me into the trap of over trading!

So What Did I Learn?

knowledge

One thing I really took out of this whole experience was that my need to have so many positions open and be constantly watching the market, wasn't all about just making more money.

I had convinced myself that having my finger on the buy button was an essential part of not missing any opportunities, but what I was really doing was feeding my need for the thrill and excitement of pure action.

This is why, for example, we see so many people drawn to the "glamor" of day trading, because it can be fast and frenetic and it's exciting. Its the reason why some traders feel the need to trade every single setup they see.

Ultimately you end up with a mindset that leads to over trading, this leads to poor analysis, rushed decision making, increased stress, mental confusion, and large losses. Especially, as I found to my own detriment, when the market turns and you have to deal with a whole new set of trading criteria as well.

So Why Does Over Trading Lead to Decreased Profits​?

shrinking profit

Looking back now I think my biggest problem was that I equated the work involved with trading in the same light as someone working in a normal job. I felt that if I worked harder at it and increased my activity in the market then I would earn more.

Unfortunately in the markets it doesn't work this way because there is one other variable that people fail to take into consideration and this is... probability.

When we work in a real world job we know that if we work harder we can earn more money. The trouble is that in the markets you can work hard and make no money, because you have to also deal with the probability of loss.

The really ironic thing with this is that the more you try to trade, the more the probability of winning consistently goes against you.

Consider this. The probability for any trade you take is basically 50/50. There are really only 2 outcomes. You have a 50% chance of making money or a 50% chance of losing money.

Now if you take another trade, your chances of getting it right twice in a row now diminishes to 25%, take 3 trades and to win all 3 it becomes 12.5%, 4 trades 6%, 5 trades 3%, etc.

So as you can see even though your chance of winning each trade is 50/50 your overall chances of winning every trade when you take on a lot of trades shorten dramatically.

This is what essentially occurs when you over trade.

The Real Enemy is Yourself!​

enemy is yourself

My own disastrous experience was a huge wake up call and learning experience for me and made me also realize that even when I was actively trading, I was also seeing the other traders who make up the market as my competition.

The truth is that there was really only one trader I was competing against and that was myself.

I thought that by hopping on board every buy signal that came my way I was somehow taking advantage of the market. This is, as it turns out, is a really popular misconception for many traders.

The reality is that the amount of over trading is usually directly proportional to the amount of losing trades you experience.

Psychologically what this means, is that as the amount of trades are increased (in the belief that you are somehow controlling the markets) you are actually being controlled more and more by the markets.

There is only one thing that can control the outcome of the markets and that is you. You can try control all elements of your trade as much as you want, but it will never work 100% of the time.

As we saw earlier on it will still fail, probably 50% of the time at least.

If you then let these moments of failure affect you so that you ditch your trading plan and start to "wing it", you're on the road to disaster.

You have to learn to react quickly and precisely with what the market offers up to you instead of getting caught up in over-analysis and attempting to second guess what the market will do next.

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So How Do We Change Our Mindset?

change

The first thing you need to come to terms with is that it is fine not being invested in the market and treat that situation as if it is a good thing.

Start thinking of this sitting on the sidelines as actually being a profitable position and not a missed opportunity for some once in a lifetime trade that will never show up again.

Incorporate into your trading plan a maximum allowable number of positions that may be open at any one time. I would say 3 at the most.

Understand the odds and the maths involved with trading, and implement strict money and risk management to every trade you seek to take.

If the risk to reward isn't there, pass up the trade and wait.

Just because there is a good buy signal doesn't mean that every trade is worth taking. Look closely at nearby support and resistance to see where the price may falter.

Instead of taking new positions in different stocks, pyramid more into trades that you are already in. You will be more comfortable because you will be "back stopped" by already being in profit.

You'll also tend to know more about what to expect from a stock you are already trading and have probably studied and followed for a while.

You have to realize and come to terms with the fact that there will ALWAYS be opportunities presenting themselves in the markets.

By being more patient and diligent and actually waiting for great trading opportunities to present themselves and come to you, you then greatly increase your chances of success.

As a result you will have fewer losing draw downs, less stress, clearer thinking and increased profits.

​Catch the Perfect Wave.

perfect wave

Finally I'll leave you with this analogy that I think perfectly sums up the kind of mindset you need to cultivate:

Imagine you are a surfer out in the water trying to catch a wave.

If you paddle for every wave that comes along, the end result of this is that pretty quickly you'll end up worn out, frustrated, make poor decisions and take waves that are of low quality.

The truly great surfers though have learned the benefit of waiting for the perfect wave to come to them.

They ignore the poorer waves and in this way they conserve their energy, stay calm and focused and catch the more perfect waves that they desire. The end result of which is that they actually catch less waves but end up with longer more quality rides.

This is the essence of making more by trading less!​

Thanks for reading this post, and I hope you got some useful insights from it. Mindset is everything in trading and something most people have to develop in order to be successful.​

Have you found yourself over-trading at times? What was your experience like and how did you finally resolve it?​

4 Comments… add one

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4 comments… add one
Brenton February 4, 2016, 16:10

Hi Peter
Great article and great insight into many of the traps that we have all fallen into. As Van Tharp states we don’t trade the markets we trade our beliefs about the markets. Our mind is capable of convincing us of all sorts of things that are going to fundamentally impact on our profit margins. I was trading so frequently at one stage my brokerage costs were really wiping out gains. While I was still making net profit I had a win ratio of only 30% and in the long run the system was not sustainable. It took me a long time to develop the patience to develop a process to filter out high risk trades and to only enter trades that offered the best reward to risk ratios. I continue to learn and to make lots of mistakes but I now focus on mastering my interaction with the market rather than the market itself.

Peter February 6, 2016, 19:29

Thanks Brenton, I went through the same thing myself and now I’m hapy to just wait and let the good trades come to me. I think one of the biggest traps is to think that you always have to be “in the market”, this attitude just led me into over trading and chasing high risk trades. Its ultimately all about patience and discipline.

Nicholas June 21, 2016, 07:29

Excellent article, I always say if you cant make money then u must preserve ur money/trade less until ur system is profitable or at least break even. Taking only the best setups, reducing high priced broker fees, accumulating screen time, back testing a methodology that best suits your goals and personality all contributes to a better trader. Thank you for all that u do, ur work is greatly appreciated. Keep it up, look forward to the next one…

Peter October 2, 2016, 09:54

Cheers Nicholas, been a bit busy of late but there are more posts to come shortly.

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