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Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.
This article discusses overtrading. How do you figure out if you are overtrading and what should you do to cure it? Let's take a look.
Are You Overtrading?
In 2007, I came to the conclusion that the type of trading I was doing wasn't working as well as other techniques, so I decided to change. That was strange since I made over 22% in 2006,
handily beating the closest average, the Dow industrials which had a gain of 16.3%. I sold the stock (Michaels Stores was taken private) that had powered my results in prior years,
so I started looking for replacements.
The trade in Pioneer Drilling (PDC) shows the type of behavior I was seeing in some of my trades.
I bought the stock as it broke out upward from the congestion zone, but price collapsed. Soon, it was clear that it had reversed and broken out downward instead, so
I sold the stock, taking a loss.
I should have recognized the potential for price to move lower because it often takes the shape of a measured move down chart pattern. I show that pattern beginning
at A, dropping to B, correcting to C, and finishing at D. That's hindsight, of course, and hindsight is always 20-20.
As it happens from time to time, I sold just days before price resumed its upward move. If I held on, I could have doubled my money, as the chart shows. In other words, this trade
tells me that a longer hold time would have been rewarding.
As part of your year-end review, look at your entry and exit timing. If you find you are entering early or late, then make changes. If you are exiting early (most likely) or late,
then make changes.
Overtrading: The Fix Is In
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For me, the answer was to focus on fundamentals, a return to the way I started my investing career. By stopping trading and focusing on timing the exit, coupled with a market that
has rewarded holding, my results improved. I expect to double or triple my money within 2 to 3 years, mostly by holding what I own now. I will trade from time to time, especially when
opportunities present themselves (like an inverted dead-cat bounce), but I can make more money by ignoring the weekly ups and downs and not get shaken out of
trades like PDC illustrated here.
With your trades, ask yourself if you held longer, would you have made more money? The answer is probably yes. One solution is to use a higher time scale to exit. If you're a day
trader on the 1-minute scale, exit using the 5-minute scale. If you're a position trader using the daily charts, then switch to the weekly scale on the exit.
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-- Thomas Bulkowski
Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. In case of injury, notify your supervisor immediately. He'll kiss it and make it better.
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