09/01/2008 12:00 am EST


Tom Busby

Founder and CEO, DTI

Deciding on a definition of "overtrading" is much the same as defining "a lot of money." It is different for everyone. Twenty trades a day is too much for a swing trader and perhaps not even enough for a scalper. Someone with a million dollar account will trade more than a person with twenty thousand in their account. You get the picture.

So how do you determine a classic over trader on any level? My answer, ironically, "do they make money on a weekly basis after commissions?"

An area of struggle exists in making and breaking goals and stop losses. Traders tend to make their daily goal every now and then with 2-3 trades and quit. On a bad day discipline challenged traders who have lost money will trade sporadically throughout the day, throwing rules out the window just to try to make up what they have lost. By the end of the day not only did they lose more than their trading plan allows for in a day but they also traded exponentially more than was needed, which potentially makes losses far worse due to commissions.

How does one cure this? It is simple.look at trades taken over the past 2-4 weeks. Break down the winning days and losing days and look at how many contracts were traded. Figure out your average number of contracts on a winning day and then the average number on a losing day. The average number of contracts on winning days should probably be the amount of contracts you should trade. If the number of contracts you trade on a winning day and losing day are the same then break down the time of day that you are making each trade, which we will discuss in more detail next week. Along the same lines as day trading, swing traders can look at their average number of trades throughout the course of a month and see what time of the month as well as what time of year produce the most profitable trades. Use that average number on the winning days and make that your guideline for each day or month to see whether you overtrade or not.

Use the average number of trades as a pivot. Any number of trades above that pivot can be a warning sign. Consider anything over that average number overtrading unless you made a change in trading style.

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