So far 2013 has been one of the strongest years in recent memory so I’m cutting back my trading.
Why?
The last thing I want to do is force low probable trades that bleed my profits.
Each year as summer draws near I’m reminded that the markets tend to be more volatile while trading on lighter volume as market participation isn’t nearly what it is during the rest of the year.
Earlier in my trading career I traded whenever I sat down at my computer. I’d spend hours looking for a trade just so I’d have a position. It was only later when I went through my trade metrics that I realized Friday’s were my biggest losers.
Upon further examination the larger number of losing trades occurred in thesummer months, especially Fridays.
To add to a poor track record over the summer months I’m also keenly aware that bull markets can be very forgiving of hastily made trades. Errors are quickly erased as price moves higher and profits climb. It feels good, like everything is working correctly. The issue with the current market, as summer approaches, is the odds are high that lots of bubbles have formed.
I’m referring to the bubbles we tend to create in our own trading, specifically overconfidence. Don’t get me wrong, confidence is needed in yourself, your system, and the market as a whole in order for trading to work. However, overconfidence in any of these areas can lead to low probable trading as over-trading occurs. It’s easy to become overconfident after a string of wins and many traders fall victim, especially guys.
THE NUMBERS ON OVERTRADING
Researchers (Barber and Odean, 2001) looked at 35,000 trading accounts over a period of six years to see if overconfident investors trade excessively. The results should not be too surprising, this is what they found. Single men trade 67 percent more than single women. In addition, this over-trading reduced the male’s returns by 1.44 percentage points per year more than the single women.
Bottom line is that overconfidence can lead to over-trading which leads to diminished returns. Summer trading can be difficult as setups that once worked don’t yield nearly the same results. The mistakes that were made, and forgiven before, tend to slowly gouge at yearly profits. As mentioned earlier, this is especially true in bull markets as sloppiness in execution, trade management and reckless risk taking are often rewarded with profits. In other words, bull markets can be very forgiving.
SUMMER DISTRACTIONS
As June grows older children get out of school as beach trips and family vacations take center stage. If you, like me, are going to be busy with family and thus have less time to commit to the market, I’d suggest cutting back your trading as well. I’m not suggesting a complete withdrawal from the markets but rather trading with smaller size and/or less frequency. Obviously this suggestion depends on your trading style so your mileage may vary as your approach is more than likely different than mine.
DON’T FORCE TRADES
Trading is a difficult business. Like any other business, trading demands hard work (effort) on the participant’s part. If you expect the same results you’ve had while spending less time preparing for trading and more time with family, you may be in a bubble. Bubbles are easily seen in hindsight as the warning signs that may have suggested the bubble tend to glare; this is known as hindsight bias. Don’t bleed your profits by over-trading. Instead read market related books, study new systems and indicators.
Take some time to review your prior trades to tighten up your strategy. Simply do anything other than force trades. Whatever you decide to do this summer please enjoy it and create some lasting memories.
