There’s Always Another Trade Down the Road:
So one thing I’d like to talk about is overtrading or worrying about taking a loss on a trade. A lot of people get into the trap of trading too many trades. So for instance they’ll be trying to capture 5 or 10 cents repeatedly. Some people actually can get away with this but especially today in the age of HFT’s it’s going to be much, much harder than it used to be to do that.
So, you have to take into account what your commissions are costing you each time you do a round trip and then you have to relate that to how much you’re likely to make on each trade. Which means that a lot of times you’re better off passing on small gains. So, one form overtrading can take is when people make a lot of trades where their gain is relatively small in relation to the commission. So, for instance let’s say you’re trying to get 6 or 7 cents on a trade but your commission with the spread is going to be 2 cents or a penny and a half. That doesn’t really make sense in the long run because the amount of times, the percentage that you have to be correct on that type of a trade is just too high. It’s really very hard to accomplish.
You’re better off looking for 30 cent gains or 50 cent gains or 1 point gains and then paying the 2% vig on those trades. Another way people overtrade or fail to recognize that it might be a good idea to wait for the next trade is when they get in a losing trade and they don’t want to cut the trade off. They just want to stay in until they win and they don’t really think about the damage that they are doing when the trade is going against them. It’s a pretty good idea to have a stop loss ahead of time or a certain amount that you’re willing to risk on each trade, and to be able to cut that trade off if you reach that point or maybe even before that point if you feel that things have turned around and that your idea is no longer valid. And like the graphic says, there is always another trade down the road. So, there’s no harm in jumping off of a bad trade and either getting in in a short period of time or getting in another day.