Trader’s styles and outlook evolves as traders develop more skills, usually through experience. The majority of new traders begin with excitement and endless potential of the markets. Humble pie typically soon ensues and just as a child learns fire is dangerous by getting burned, Traders reevaluate thought patterns while equity dissipates. Below are several behaviors that can help with a Trader’s progression primarily through the first stages of overtrading.
Larger Time Frames
When looking through a microscope or living your fictitious version “Honey, I Shrunk the Kids”, ants and blades of grass can appear as skyscrapers and gargantuan beasts. Small time frames or volume based charts can give an inaccurate perspective of the futures market. Traders using 1 minute charts and 100 tick charts can misconstrue a minor flinch as a monumental breakout. This skewed analysis is a major component to overtrading and ultimately trading losses. There is a simple and obvious solution…larger time frames! Incorporate hourly, daily and weekly charts into your analysis. Confirm your trade on larger time scales and use the smaller one to pinpoint entries.
Risk to Reward Ratio
After broadening your information intake, defining risk vs. reward is another understanding instrumental to success. Depending on your account size and trading strategy the equation isn’t imperative, but the presence is rather important. Without defined profit targets and stop levels traders are prone to overtrade.The market has and will never move in straight lines, instead the push and pull of the bids and asks moves the markets in waves. Giving and reclaiming what has been given is routine market movement. Traders must aim to eliminate the noise and decipher what information is pertinent. Mainly your profit and loss and your trading position should top this list. There is a simple inverse equation that will help define risk and reward setups. The differential in the risk (stop) to reward (profit target) will define the needed success percentage.
For example: If you risked 5 points on an ES short and your profit target is 10 points you have a 1:2 risk to reward ratio. Based on this ratio you would need to have a winning trade 33% of the time to break even. In this example you would lose 10 points for 2 losing trades and earn 10 points on the 1 winner, anything over 33% would make you profitable and anything less would decrease your balance over time. Inversely, risking 10 points looking for 5 points (2:1 risk to reward) would require over a 67% success rate for profit.
Having a defined ratio will discourage overtrading because a disciplined trader will patiently wait for the target or stop to be hit and not exit or enter prematurely.
The adrenaline rush and anxiety running through your veins when sitting in front of a live future trading platform can often be distracting and compelling. There aren’t many areas of life that can get the blood flowing like futures trading. Sitting there watching and not actively participating conjures feelings of regret and missed opportunity. These feelings can lead to overtrading and irresponsible entries and exits. Successful traders are patient with the winners and impatient with the losers. When a trade is going your direction there will be all too many opportunities when impatience rears its ugly head, especially during retracements. You need to now, more than ever to stick to the plan, constantly reevaluate the information, and make adjustments accordingly. In the end taking off trades too early has the same repercussions of taking off a trade to late, losses. Don’t trade to trade, don’t lose sight of the goal because you are getting restless or haven’t had lunch. Markets have little empathy for your individual circumstances or over exuberance.
Overtrading is one of many obstacles to overcome on the path of successful futures trading. By using some of the trading tools above you can curtail some of those errors. Contact Cannon Trading and a Broker can help enforce these principles over the phone.
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past Performance is not indicative of future results.
About the author: Ilan Levy-Mayer is Vice President and Senior Broker at Cannon Trading Company. He holds an MBA in Finance and Marketing from Hebrew University in Jerusalem. His experience in the industry dates from the beginning of crude oil futures, and he helped developed several trading systems. In addition, Ilan written several articles about trading methods and trading psychology, and have been quoted and published several times in SFO magazine, Futures, and Bloomberg. Ilan has been licensed as a commodity broker since 1998.