Controlling Emotions and Overtrading

Q. I'm looking for a spread betting company that will hold the trade open until I choose to close it, with me incurring the daily interest to keep the trade open, but without it closing each night...

(Finspreads were closing my trades each night and re-opening them incurring any profit or loss for that day). I also want the ability, as per Metatrader 4, to have multiple same-direction trades open at any one time, allowing me to close these trades on an individual basis as I choose.

A: Ayondo offer rolling daily trades that do exactly as you have stated you are looking for. If you opened a rolling daily trade today, that trade would remain open and roll over into the next day continuously until either you manually close out of the trade or until you are stopped out of that trade.

Your multi-entries will be tracked at an average price and you can only close the whole position, but you can close them individually via variable independent stop loss or limit profit options.

Q. Is there a company which permits me to be long and short of the same instrument at the same time, in the same account?

My reasons for this are two-fold; sometimes I wish to keep a longer trade open whilst taking a shorter term trade in the opposite direction. The other thing is about crystallizing gains/losses - if I am long on a contract and want to short it I may not want to crystallize a loss/gain (which will affect your cash balance)

A: I believe you are referring to Force Open - to open a position without closing an existing position, the only company I know that does it is IG (although there may be others).

If you really want to do this sort of thing, you could have two accounts, one a main account and another a sub-account. Nominate one for long term trades and the other for short term stuff. Otherwise the only way to make an equal and opposite trade would be to trade in different expiry dates in the same market. Most markets have rolling and next two quarterlies (at least). However, all you are doing is opening two trades and paying the company the spread on both

I can understand the psychology of wishing to keep a trade open whilst 'hedging' over a difficult period...but from a purely financial point of view you should just close the existing trade and then re-open it at a later date/time, rather than make an equal and opposite trade as it costs money to keep positions open. So if you have two positions you will lose on both on cost of carry (a minor amount each day). And from a trading point of view, you now have two positions to make decisions over rather than just one.

Q. A few weeks ago you mentioned RHM. Personally, I wouldn't touch RHM with a barge pole. It just doesn't feel right to me.

A: Try very hard to ignore any feelings that you might have of this kind like:

  • That industry must be due for a downturn...
  • They're a great business...
  • Have you been in one of their stores recently?
  • This technology will be a huge success once people understand it ...
  • This time its different...
Instead, just focus on company fundamentals like:
  • What is the historic and forecast yield?
  • What is the forecast level of earnings cover for the dividend?
  • Does the company have a record of increasing its dividend during the last few years?
  • How much debt does the company have?
  • What is the company's market capitalization?

These are cold hard facts. And as for most of the rest, there are just too many variables to consider and the self-delusion that we can actually understand how they all interact can be very dangerous to our wealth.

Q. I have heard mention, and read on numerous occasions, that it is not wise to over-trade. does one define overtrading? Examples would be appreciated.

A: This discussion really revolves around your trading systems time frame and your performance measurement system.

For example if you trade a long term system which only takes weekly signals and you find yourself interfering with the system intra week to take more signals earlier then a case could be made for over trading.

In addition to this if you find your average hold time decreasing because you are anxious to exit positions either because you are worried about a perceived profit slip or because you are simply bored with the lack of activity then you are moving towards over trading.

For each individual over trading can only really be defined in terms of their previous history which means looking back at your performance data and how that relates to your system and the time frames it trades.

I have found that when I'm a bit bored with other aspects of my life, I tend to tinker with my system and over-trade. I find myself more & more attracted to short term trades & get rather too attached to intra-day candlesticks. However, when I compare my results during those periods, I actually haven't made any more money than when I was implementing a medium or a long term system.

Another usage of the term 'over-trading' I've seen in the literature is simply putting on position sizes that are too big for your account (e.g. consistently exceeding the "2-percent" rule; see Chande's book "Beyond Technical Analysis").

For me over trading means that I have to give back too much of my life to watching the screen - which partially acts like a job replacement. It also means I begin dreaming about trades and have the occasional 3am morning where I'm lying in bed churning about all of it. I notice I'm over trading from my reactions to trading. If I'm over-reacting to profits & losses, it probably means I've got too many positions on, or my position sizes are too large, or I'm trying to get unreasonable profits in a very short period of time.

Q. Can you recommend a book or perhaps a method of how one might develop patience (in the trading sense)?

A: I have been trading stocks fulltime for quite some time now and lack of patience (esp. holding onto winners) has been my one Achilles heel my entire trading career. I just have an enormous urge to ring the register way too often.

Here are few few points to keep in mind:

A Stream

A-1. Trade your rules and don't ever look at your intraday P/L.

A-2. What helped me was keeping a side by side dairy of what I did and what the system did. After staring at how stupid I was for a couple of months, I got better at trading the system and not my incorrect gut feel.

A-3. Don't trade to make money or, worse, get money back. Trade to execute well and have decent entries and exits. I have always found, for myself and my traders, that when money becomes a focus (gotta make $$ back, gotta beat my weekly record, etc), there is more trading, more losing, more holding of the wrong trades and more quick profit taking. These all end up giving you the opposite result from the one you desired in the first place.

A-4. Anyway if I understand his concepts correctly (half way through the book "The Disciplined Trader".) your/my lack of patience may be a result of fear. In this case fear of giving back profits. For example when a trader is afraid or stressed they are generally in a hurry to eliminate that stress/fear. Time seems to move very slowly even though it's not and you become impatient. As soon as you exit the trade the fear/stress is gone. In contrast when your elated or experiencing something that is gratifying time seems to move more quickly. You wish it could last longer.

Until we learn to recognize and control the fear of giving back profits one possible solution may be trading smaller size. In dollar terms you'll have less profit/capital at risk and therefore may feel less fear of losing or giving back profits so it should be easier to let your profitable positions run, like we all know we should.

B stream

B-1. Try reading a book while you are trading, or work out. Keep on audio alerts, to alert you when your price gets to your set target, that way you don't have to watch it constantly.

B-2. Study some books about limit holdem poker and play online on one table for a few months with the recommended starting hands from one of the books! That will definitely teach you to be patient.

B-3. I predominantly spread bet, and usually the euro using tick charts instead of minute charts, although I would think the same thing about this. Whilst trading I have seen that it's very easy to start looking at the last couple of bars and trying to make them significant, whereas across the entire chart they are just noise and without the same relevance. I have come to look at the bars for patterns and entry timing, but try to do so in the context of what I see is more significant price points, and changing my focus to price from bars, and especially the last couple, has made me far more patient and comfortable holding trades.

B-4. To my way of thinking the main function of patience is in waiting for a good trade. Some people are not psychologically equipped to sit out the wiggles. The main thing is be consistent and move on to the next trade with no regrets.

 ...Continues here - Leveraged ETFs, Oil stocks, Contango and Backwardation

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