One of the most common ways traders go broke is through over-trading.
Over-trading is a very unfortunate occurrence because it’s caused by a very basic human desire to control results by taking MORE action.
Think about it, in just about every endeavor we participate in, taking MORE action results in more positive outcomes. More exercise results in better health. More studying results in increased knowledge. More encounters with potential customers results in more paying customers for your business. You get the idea.
But in the world of trading, taking more action does not result in a more positive outcome.
In fact, the opposite is true: making more trades actually increases the likelihood of failure.
Jesse Livermore famously summed up this principle when he stated, “It was never my thinking that made big money for me. It was my sitting tight.”
The propensity to over-trade is driven by a “grass is greener” mentality. Example: “That stock went against me, but this next stock will surely make up for my losses.” Or worse: “That last stock was a loser, which means I’m now DUE for a winner.”
It doesn’t help that this “grass is greener” outlook is aggressively marketed by the financial news media.
Fund managers and brokers do interview after interview talking about their latest positions; the positions you “need” to be in right now in order to make money in this market.
Pundits fuel the over-trading fire by telling us things like, “There’s ALWAYS a bull market SOMEWHERE, and I promise to find it for you.”
The fund managers and pundits are basically saying the same thing over and over again: “It’s time to get rid of what you’re holding and buy something new.” They tell us the grass is always greener in some other stock or some other sector.
The fact is, there is a time to trade and a time to sit. A time to be aggressive and a time to be patient. A time to take action and a time to be “lazy.”
Profitably “sitting” may mean holding onto winning positions as they dip through a “normal” correction or it may mean sitting in cash while waiting for new winners to form proper bases. It often means a little bit of both.
The point is: OFTEN times, sitting and doing nothing is the most profitable trading decision you can make.
Force yourself away from the monitor if you have to. Spend the day golfing instead of watching CNBC. Spend an afternoon chatting with your family instead of other traders. Whatever you have to do to avoid trying to “trade” your way out of a loss, do it.
This type of “less is more” thinking goes against everything we know about achieving success in every other field. That’s what makes it so hard for traders to grasp.
Because traders are often high-achievers with big goals and can-do attitudes, we find it difficult to accept that sometimes the best course of action is to take no action at all.
To succeed as a trader, you have to be willing to accept that usually the best trade is no trade at all.
Regardless of what the fund salesman or market pundit might tell you, knowing when to trade and when to sit is the real key to massive fortunes in the Wall Street jungle.
* Is now a good time to be trading or sitting? What should you be holding and what should you be avoiding right now? To access the full portfolio of Darvas stocks – with EXACT buy points and sell points – check out the latest issue of Darvas Trader PRO by clicking here.