Gold brutally reversed off its all-time high…
Bitcoin and other cryptos are swinging all over the place…
And after a sudden pullback just two weeks ago, stocks are fighting to reclaim their highs.
Keeping on top of it all can get daunting. You don’t want to miss out on the action… but when markets behave erratically, it can be difficult to know when to trade…
And if you scramble to catch every move, you run the risk of suffering a rapid succession of losses.
That’s why knowing when to pass on trades is key to being a successful trader. That’s what I want to look at today…
Overtrading was something that I struggled with when I started out in the trading pits of the Chicago Board Options Exchange (CBOE) more than 40 years ago…
I was eager to trade every move… or chase trades that had already gotten away. I blew up my trading account multiple times.
Of course, the size of your trading account plays a part in determining how many trades you can have open at once. But no matter how much capital you have at hand, some key principles will help determine how active you should be.
One of the major issues that some folks have is that they simply don’t know what their strategy is. One day, they act like they’re a longer-term trend trader. The next day, they’re trying to jump on a short-term stock reversal.
To be clear, both are genuine (and popular) strategies. But trying to do multiple strategies simultaneously can lead to confusion, frustration, and even mix-ups. You can end up second-guessing yourself at every move.
So it’s vital to define your strategy before starting to trade. Inherently, that can help you eliminate some potential trades if they don’t fit the profile of the strategy you’re using.
If you’re focusing on short-term reversals, for example, you can ignore longer-term setups.
That has been one of my secrets to success…
The strategy that I have used for decades is “mean reversion”…
Put simply, I look for stocks or indexes that have overshot in one direction. Overstretched stocks tend to reverse course. I look to profit when they snap back the other way.
And because that’s my strategy, I know I can avoid stocks drifting around in “no-man’s land.” That is, stocks that aren’t trending strongly, on the cusp of a major reversal.
Instead, I focus on stocks that are trading at extreme overbought or oversold levels and are vulnerable to a reversal. That helps determine the number of potential trades I can do.
Market conditions only offer up so many mean reversion trades at a time… That’s more important than how many trades I want to do.
And I may restrict my trades even further.
I might focus only on the sector seeing the most action… or I might wait until I see several indicators pointing in the right direction rather than just one or two.
By being selective, we can preserve our capital for the best, most-promising setups. And we can also pay more attention to the trades we have on with less stress.
So rather than feeling like you always need to be active, you need to flip things around…
Only enter trades based on your strategy… and focus on finding the best setups that meet your criteria. You don’t have to jump on every possibility you see.
That way, the market will determine how often you trade. And that can help alleviate the pressure of feeling like you’ve always got to be active.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
