ABC Secrets to Prevent Overtrading

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss how everybody falls into one of two camps. No matter how successful you are, or how much you struggle, in my over 30 years of training traders to trade, I find that the two types of traders are either the traders who are in the overtrade camp, or in the afraid to trade camp. This week we are diving into overtrading prevention.

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

The ABC Secrets to Prevent Overtrading

Now I talk about how there are two types of traders. Everybody falls into one of two camps. No matter how successful you are, or how much you struggle, in my over 30 years of training traders to trade, I find that the two types of traders are either the traders who are in the overtrade camp, or in the afraid to trade camp.

Now, the reason I bring this up is when we talk about overtrading, if we look at people who are afraid to trade, people who are afraid to trade, they have a hard time pulling a trigger. As a result, you don't go broke quickly on the trade you don't make. What you do is you die a slow death. You die the death of having to pay living expenses with no trading income. You die the death of having to pay trading expenses with no trading income. You die the death of wasting your time and your life because you don't pull the trigger. But it's a slow death.

Overtrading is very different, and this is why we're talking about it. When you get involved in overtrading, people can blow themselves out in a day, in a few hours. There are examples of traders just losing complete control, and just diving back into the market again, and again, and again and again, and losing, losing, losing, losing, and all of a sudden finding themselves down 25, 50, or 100% of their account in just a few hours to a day or two. They lose control. So, people who engage in overtrading, it's dangerous, they can lose everything quickly. It's important if you have a bias toward being an overtrader, you must have protocols, processes, and procedures in place to help you slow down.

Let's talk about some of the reasons. Why do traders overtrade? Well, in some cases, they double down, a trader feels like if he adds to his position, he can quickly get his losses back and be profitable. In gambling, this is called the Martindale strategy where you double down and the idea is, well, if I lost $1, I'll bet $2 Next time, and the next time I'll bet $4. And next time, I'll bet $8. And eventually, I'm going to win, and I'll get all my money back. In trading, this is what's called throwing good money after bad. What's happening, if you look at from a reward to risk perspective, if you started off betting $1 to make $1, and you lose the first time, now you're betting $2 to make $1. So your reward to risk ratio now is point five to one. If you lose on that one, and you go again, now you're betting $4 To make $1, and now you're only your risk to reward your reward to risk ratio is .25:1, and it doesn't always come back. You can only take a string of losses, particularly bigger and bigger bet sizes so long until the account is gone. This is a quick way to go broke. You'll see this talked about where we want to scale up, we want to pyramid up in a way that we add to our position as it's working, not as it's going against us.

The second reason traders overtrade is what we call rationalization through time and this is like, have you ever been on a diet and you're like, "You know what, I didn't eat well today. Screw it, I'll just eat whatever I want today I'll get back on the train tomorrow." So you're sitting there late at night, you half a gallon of ice cream or half a cake or dozen cookies or something like that. What you're doing at that moment, you're rationalizing, "it's okay because tomorrow it'll be better." Well, a lot of traders do this in their trading. They're having a bad day, things aren't going the way they hoped, and so they're like, "I'll get back to following my plan, tomorrow. I get back to being a disciplined trader tomorrow. For today, I'm just going to kind of do what I want to get this money back." The last hurrah.

That is a great way to inflict major damage on your account. We always have to be disciplined. We need to reframe it not that we can do it tomorrow, but instead, we're going to do what we're supposed to today, and maybe tomorrow, we don't follow our rules, but today we're going to follow our rules. You'll see that's at the heart of the 12-step program for AA and other types of drug anonymous programs, where I might have a drink tomorrow, but I'm going to wait and not have it today. I'm not going to have one now. I might have one later, but I'm not going to have one now. When we start trading, I'm gonna follow my rules right now, later maybe I'll give myself some room to do what I want to but right now I'm gonna follow my rules.

The third is losing control, and this is what I mentioned just a few moments ago. So you get a string of losses, and with each loss, the panic, the despair grows and grows and grows. People are just like, I lost, I lost, I lost, and just, I gotta get back in, I gotta get the money back. A lot of times this will happen, especially at a specific trade idea. They're long something, it's not working, they get out. Then they're like, oh, my gosh, that was a low I need to get back in. So they hop back in and the market goes against them, and they lose more money, and then they get out, and they're like, I knew that was the bottom I gotta get back in. So they get back in, and it goes down again, and now they're just losing control. They can't accept that they actually have a loss and they're out of control. In this moment, they have to get away. They have to do something to break the loop that's going on inside their head.

Let's talk about the ABC secrets to prevent overtraining.

• Away from the screen for success.
• Before any trade, execute your checklist.
• Call it a day.

Away from the screen for success. Traders who suffer from overtrading need to slow down. They need to take the space between stimulus and response, the idea to trade and placing the trade, and they need to lengthen that gap, which slows them down. One way to remove yourself, there are three ways we're going to talk about, but one way to remove yourself is to get yourself away from the screen. Don't stare at the screen. The more you sit in front of the screen, the more likely you are to lose control. I'll say that again. The more you sit in front of the screen, the more likely you are to lose control. A lot of traders sit in front of the screen all day, and what a lot of them will see is that make money in the morning, and then as the day goes on, they give it back. This is a common thing. You see so many traders make money early and give it back. It's actually rare, a lot more rare that they're down early, and they come back. You kind of have like three days, you have days, you're doing well, that you give it back, you have days that you just lose money all day, and you have days that you lose money and make it late in the day. I'm talking about kind of a scratch to losing days, but very often, the traders have money in the morning, and then loses it as the day goes on. Isn't that interesting? Why do you think that is? It's because they stare at the screen all day, and the more they stare at the screen, the more likely they are to trade, the more tired they are, and the more sloppy they are. So they start making mistakes.

One of the things we talk about is seeing ghosts now. We've been taught to work, get up and work and you get paid for the work you put in. Trading is very different than typical work. One of the reasons people struggle in trading is everything you learn in the work life is almost flipped on its head in trading. What do I mean by that? When we talk about seeing ghosts, our brain, if we sit there all day, our brain is like why are we sitting here? We should be having some kind of justification for this. Your brain starts looking for things to do. It starts looking for trading patterns, a lot of times patterns that are outside your system, and you'll start to see ghosts where you see things in the charts that aren't really there, then you start making trades on faulty information and they don't work. Early in the morning, you're fresh, you're ready to go, you see things well, but as the day goes on, it slips. So any plan that has you in front of the screen all day long is setting you up for failure because it is psychologically flawed, it is not possible to sit in front of the screen all day every day and be at peak performance.

To be in peak performance, we need to take regular breaks. You should never trade more than 60 minutes straight, and preferably really never more than 30 minutes, I use this concept called the Pomodoro Technique, where I've set a timer for 25 minutes, and then I get up and walk away and take a break, clear my head, come back, drink some water, move around, change my physiology and my state. One of the things we teach is that you should spend most of your time finding the right market to trade and the right setup to trade, not watching your current trade, and not watching for a trade to show up into a signal. So you spend your time finding the right market to trade and then finding the pattern you're going to take. Then go in and make the trade, and then once you've made the trade, enter your stop in your peel. Set your price and level alerts. Set a timer for the end of the period, whether it's ended day or at the end of 60 minutes or 15 minutes or whatever it is that you're trading, and then get away. Minimize the chart where you don't see the chart and go do something else to be occupied. Go do research, go do busywork, go do anything, go have fun, go work out, go play golf, whatever the case may be, but do something that gets you away from the screen. Then when your alert goes off, your price level goes off, come back to the screen, open the screen up, see what you need to do, be prepared for the next period or take action need to take, and then minimize it and get out of there.

Before any trade, we execute a pre-trade checklist. You should make a list of your trading rules that must be met to approve a trade. This is your pre-trade checklist, and so the rule is, is that you must fill out your pre-trade checklist prior to entering any trade. If you don't do that you cannot make a trade, and if you make a trade without your pre-trade checklist, you broke your rules. Taking the time to fill out the pre-trade checklist, we'll make sure it will slow you down and make sure that every important aspect of your rules is met before you pull the trigger.

Call it a day. You should have rules in place, money management rules, that make you stop or at least make you take a break for a period of time if you have a certain number of losses in a row. If you have three losses in a row five losses in a row take a break so you don't accelerate into revenge trading, trying to get your losses back. You should have a stop in terms of R, so if you get down five R in a day, five R in a week, five R in a month, whatever your timeframe is, you're done. You're not going again, you're not going to accelerate losses. The idea is if you're not performing well, well let's cut it and come back when we're fresh, and you can do this one or two ways you can use R or you can use a capital dollar amount. Either one is fine, you can use both, but you couldn't have a rule that says if I lose 3% of my capital, or $5,000, or whatever the case may be, I'm shutting down for the day.

By doing this, what you're doing is you're preventing yourself from doing major psychological damage to yourself, and you're protecting yourself to come back the next day. I tell my students if you see any of them and you ask them, say, "Chuck asked me to ask you what's rule number one?" They'll tell you rule number one is come back tomorrow. You can't come back tomorrow, all the great things of trading cannot happen for you. So call it a day is really about protecting yourself, so you can come back tomorrow. Clear your head and come back.

One thing I want you to understand is this stuff happens to every trader. Okay? This happens to all the great traders, where they get in a funk, and they make bad decisions, they have streaks against them. The question is, what are we going to do to stop it? Can we be aware of it? How do we stop it? This is a great way to do it. When you hit that level, then the trader must call it a day and stop trading. It might be you have to stop for an hour, you have to stop for the day, you have to stop for the week, whatever the case may be,. When you take a break, here's one of the things I recommend, if you have to shut down, get out of your head what you need to in the moment, but then don't do a full debrief then wait. This is counterintuitive, but what I think you should do when you have a bad stretch like this, you should stop, get out of there and then go do something positive for yourself. Go get a massage, go to the beach, go for a walk, work out, take a nap, go hang out with your wife, and listen to fun music. Whatever it is for you do something positive for yourself to self-love yourself. Then by doing that, when you come back later, you're gonna be in a great state.

Let's recap the ABC Secrets to Prevent Overtrading:

• Away from the screen for success. Be only in front of the screen the least amount possible.
• Before any trade execute your pre-trade checklist. List your roles, and make sure you make your meeting all your rules and criteria before you make your trade slow down.
• Call it a day. If you have any kind of negative run over a period when you hit it stop trading. Show self-love by stopping and then come back the next period and get back at it.

Stay tuned every Tuesday for additional webinars that will teach you different ways to think about trading that will help you take your performance to the next level. See you next Tuesday.