Monday, October 22, 2012

Overtrading Part 2

The other point to make about overtrading is that, if your are trading too large a position relative to your equity, then it is very difficult to have an 'emotional indifference' towards that position. That phrase was famously coined by Larry Hite in his Market Wizards interview.

If you do trade too large a position, you will find your focus will be on the money rather than following the process (i.e. sticking to your system rules). In the long run, having a system that gives you a positive expectancy, and following the signals it generates, will give you the profits.

With trend following, risk management is an integral part of the process. Resolve not to overtrade your account and, combined with a robust system, you are well on the way to success. With those two factors in place, you can almost 'learn' the necessary mindset you need to succeed. This is because:
  • You will not be putting yourself under undue pressure or stress every time you open a position, nervously watching every tick for or against you;
  • You will not succumb to the temptation of taking profits on a position before you've got an exit signal, for fear of a profit turning into a loss;
  • You will not succumb to the temptation of not heeding an exit signal, which would mean accepting that you were wrong on that trade, with the possibility of a small loss turning into a much bigger, or even terminal loss.
In other words, with your risk control at appropriate levels, and the calmer mindset that brings, you allow yourself to cut your losses short, and let your profits run, rather than the other way round.

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