Focusing on trading my timeframe to reduce over-trading

In my last month’s performance review, I said that one of my goals for this month is to think more and trade less.  But in my first week of December, I have racked up 53 trades already… Average for October (a normal month) was only 34, for the entire month.  Now that we’re in the second week, I can clearly see my over-trading problem from my trading log and say to myself that enough is enough.

In terms of my account balance, I’m experiencing a 1% drawdown because of these “testing-the-water” trades.  They are small positions that I micro-manage to minimize the exposed risks by moving the stops every so often.  But the facts speak for itself, 53 trades in the first week, 23 winning trades (acceptable), 1 % drawdown (bad).  The problem with this hit and miss approach is that it is taking too much of my time with no result to show.  It’s true that a single week makes no difference in the long run.  But this just isn’t my style of trading.  It doesn’t fit with my trading strategy.  This is over-trading.

Why do people over-trade?  Lack of discipline.  Desire to catch major moves.  Afraid to miss a run.  Addiction.  Boredom.  and so on.

Over-trading has been a major problem for me back in the days when I tried day trading index futures.  I haven’t had this problem for a couple of years now.  Which is great.  But this bad habit is creeping back up on me.  This time, it’s because I am staring at the trading screen too much once I am in a position and tried to micro-manage my trades to minimize my risk.  This obsession with tightening my stops backfired and I took more trades because of it and get stopped out more often before any sizable move can materialize.  A lose-lose situation.

Since realizing that my arch-nemesis is back in business, finding a solution to restrain myself is simple.  I studied my trading journal in the past few weeks to review my best trades.  The solution to improve my performance and restrain myself from over-trading is actually both sides of the same coin.  I just need to focus on trading my best timeframe.

What do I really mean by that?  Different players and factors affect different timeframes in the markets.  Thus, prices behave differently in different timeframes.  Dr. Steenbarger has an excellent post titled Lessons for Developing Traders: More on What Moves Markets which talks about how different market participants affects the way market’s flow in different time frames.  He uses the analogy of visualizing the markets as an ocean.  Global climate affects the flow of waves across the ocean.  At the same time, kids splashing at a beach can also create ripples to these waves.  Obviously, one is a macro-phenomenon and the other is a localized event.  Similarly, central banks and institutions are what powers the long term trend of a market.  But market makers and retail traders can create ripples in the short term.  What works for one timeframe might not work for another.

My trading style has always been geared toward riding the bigger waves, e.g. my FTC setup.  So if I become affixiated with what’s happening with the short-term ripples, it would not only cause me to over-trade but also affect my long-term strategy too.  As such, here is what I will do.

1. Focus on analysis from the weekly and daily charts.
2. Determine trading setup only from daily and 3 hour charts.
3. Time my entries and exits from the 3 hour chart.
4. Execute my trade orders on the 30 minute chart and for short-term confirmation.
5. Use the 1 hour chart if necessary to scaling in or out a position.
6. Never enter or exit a trade based on the 30 min. chart (or anything less) alone.

Actually, I have started following this process this week already and it seems to be working well.  I will review my performance at the end of the month as usual to see how this goes.

Related posts:

1. An example of how trading in fear is bad for your account
2. March 2010 Trading Review
3. October 2009 Trading Performance Review
4. Early bird does not get the worm in forex trading
5. 3 reasons why I don’t use Jensen’s alpha or Sharpe ratio for my forex trading