๐๐ฏ๐๐ซ ๐ญ๐ซ๐๐๐ข๐ง๐ โ ๐๐ก๐ ๐ฌ๐ข๐ง๐ ๐ฅ๐ ๐๐ข๐ ๐ ๐๐ฌ๐ญ ๐ซ๐๐๐ฌ๐จ๐ง ๐จ๐ ๐ญ๐ซ๐๐๐๐ซโ๐ฌ ๐๐๐ข๐ฅ๐ฎ๐ซ๐! Charlie Munger, legendary investor and long-time business associate of Warren Buffet is regarded as one of the sharpest mind with multi-disciplinary deep-dive
understanding of various subjects. Carlieโs wisdom is profoundly applicable in trading as well. One of the famous quotes of Charlie goes as follows - โAll I want to know is where I'm going to die, so I'll never go thereโ.
๐ฐ๐ ๐๐๐๐ ๐๐๐๐๐๐ , ๐๐ ๐๐๐๐ ๐๐๐ ๐๐ ๐๐๐ ๐๐๐๐๐๐๐ ๐๐๐ ๐๐๐๐๐๐๐ ๐๐๐๐๐๐๐๐ (๐๐๐๐๐๐๐๐๐ ๐ ๐๐๐๐ ๐๐๐๐๐) ๐๐๐ ๐๐๐ ๐๐๐๐ ๐๐๐ ๐๐๐ ๐๐๐ ๐๐ ๐๐๐๐๐๐๐๐ ๐๐๐ ๐๐๐๐ โ ๐ถ๐๐๐ ๐ป๐๐๐ ๐๐๐.
People flocks to trading as get rich mechanism and in pursuit of higher profits they often overtrade. At the outset, I would like to explain that there exists a difference between trading often and over-trading.
In a laymanโs language, the term โ โOverโ would means - something which is out of bounds. Thus, in trading parlance, Over-trading can be summarised as โ (A) Any trade which is out of bounds of your trading set-up.
(B) Any trade or cumulative number of open trades has higher than envisaged risk associated. Thus, over-trading has nothing to do with holding period or number of trades.However, having said that traderโs attention span, temperament (fear/greed balancing ability),
confidence and deviation from discipline could push her towards over-trading. This in-turn passes the un-necessary blame of over-trading on the number of trades taken or holding period.
Due to lack of temperament, confidence and discipline, a trader could get perturbed easily by small losses. This could result in deviate from the trading plan, which in turn leads to sub optimal trades and sub optimal execution of the same.
The term sub optimal trades encompasses โ revenge trade as well as trades outside your trading plan.Sub optimal execution of trades here envisages holding the trade longer or shorter than profit/risk envisage.
Thus, if you think overtrading is just a problem for newbies, youโre wrong. At the opposite side of the spectrum is a confident trader, who has string of strong wins and greed of making in yet another profitable trade pushes him to take trade outside his trading plan and makes
him hold the loser longer than envisaged. Over-trading manifests due to both lack of confidence as well as excess confidence.
๐๐ผ๐ ๐๐ผ ๐ถ๐ฑ๐ฒ๐ป๐๐ถ๐ณ๐ ๐๐ต๐ฒ๐๐ต๐ฒ๐ฟ ๐ฎ ๐๐ฟ๐ฎ๐ฑ๐ฒ๐ฟ ๐ถ๐ ๐ผ๐๐ฒ๐ฟ-๐๐ฟ๐ฎ๐ฑ๐ถ๐ป๐ด (๐ณ๐ผ๐ฟ ๐ผ๐ป๐ฒ ๐๐ต๐ผ ๐ฑ๐ผ ๐ป๐ผ๐ ๐บ๐ฎ๐ถ๐ป๐๐ฎ๐ถ๐ป ๐๐ฟ๐ฎ๐ฑ๐ถ๐ป๐ด ๐ท๐ผ๐๐ฟ๐ป๐ฎ๐น ๐ผ๐ฟ ๐ผ๐ป๐ฒ ๐๐ต๐ผ ๐ฑ๐ผ ๐ป๐ผ๐ ๐๐ฟ๐ฎ๐ฑ๐ฒ ๐ฏ๐ฎ๐๐ฒ๐ฑ ๐ผ๐ป ๐ด๐ฟ๐ฎ๐ฑ๐ฒ๐ฑ ๐๐ฒ๐-๐๐ฝ๐)
(A) If you are using all margins limits provided by broker (B) if you are getting worried as the trade goes against you (C) If trader resorts to sub optimal exits by holding losers too long and cutting winners to early
(D)Revenge trading โ If you trade in order to recover the lost money, you are destined to over trade.(E) Transaction cost as % of profit/loss โ For a trader who is severely over-trading, his transaction cost as % of profit/loss over cumulative trades would remain at elevated Lvs
๐๐ผ๐ ๐ฑ๐ฎ๐ป๐ด๐ฒ๐ฟ๐ผ๐๐ ๐ถ๐ ๐ผ๐๐ฒ๐ฟ-๐๐ฟ๐ฎ๐ฑ๐ถ๐ป๐ด? - If a trader has capital of Rs0.25mn and using derivative segment, if she buy/sell the stock futures worth Rs1mn at same price and executes 3 trades in a day . Despite, not losing at gross levels due to brokerage,
exchange fees, STT and other government levies, he/she will wipe out capital within just 182 trading sessions (assuming brokerage at 0.015%). Thus without doing anything wrong at individual trade level, the cost of transaction cost itself explains the perils of over trading.
๐ช๐ต๐ ๐ฑ๐ผ ๐๐ฟ๐ฎ๐ฑ๐ฒ๐ฟ๐ ๐ผ๐๐ฒ๐ฟ-๐๐ฟ๐ฎ๐ฑ๐ฒ โโ (A) Revenge โ In order to make good the loss (B) Greed/ feeling of being invincible (C) Action-Bias. The First two are self-explanatory,also discussed above, the third one, Action-Bias explains the concept of lack of mindfulness.
In an interesting research paper, Michael Bar-Eli, analysed 286 penalty kicks in soccer. The analysis revealed that ball takes approximately 0.2 seconds to reach the goal. Thus, the reaction time is almost absent for the goal keeper to react.
Thus, on 6.4% times, the goal keeper was successful by choosing right or left dive and 80% of the times, penalty kicks resulted in a goal. . Thus, despite remaining at centre being the most productive option, the Goal keeper chooses either right or left in order to justify
his action to save the goal, despite the action yielding limited benefits. Staying at centre is psychologically considered as inaction, which may result in regret and risk to his career. Similarly, trader, needs who feels the need to be in the market, also suffer
from the action bias. Thus, traders need to becomes more mindful and keep on reminding themselves - โDecision to be out of action, itself is an actionโ to overcome Action-bias.
๐๐ผ๐ ๐๐ผ ๐ฝ๐ฟ๐ฒ๐๐ฒ๐ป๐ ๐ผ๐๐ฒ๐ฟ-๐ง๐ฟ๐ฎ๐ฑ๐ถ๐ป๐ด? โ(A) Overnight preparation and creation of watch list โ helps in great focus and control over mind. (B) Plan your trade and trade your plan โ Risk reward of the individual trade helps in weeding out the risky trades
(C) Trading checklist โ To prevent impulsive decision marking, overcoming boredom and selection of Grade A+ set ups. (D) Journaling and review of trades executed. (E) Trade sizing โ If trader has well diversified trading portfolio,
the outcome of each and every trade will not have significant impact, which in turns leads to prudent trading decision. Thus, trade sizing and diversification also helps in preventing over-trading. To conclude, as the legendary trader โ Jesse Lauriston Livermore says โ
โAfter spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
This spells out very clearly the need to sit tight โ which is nothing but to adhere to trading plan and stop over-trading. so if you all can resonate with this thread please show some love and RT it for max reach !! Thanks Guysโบ๏ธ๐
