How many trades do you make in an average month? In Trading, unlike other production based businesses, more trading does not result in more profits. Less is more most times.
My trading has been very light this year. In December and January this was by choice and that choice played out to be correct. By mid February and early March that choice was made by missing an opportunity and getting trapped on the sidelines. I had my most active week last week and made four trades. Two stock trades, an index trade and one currency futures trade. I felt like I had woken up from a 6 month bear hibernation. I would be lying to say staying on the sidelines is NOT difficult. It is the most difficult position to take and requires the most discipline to adhere to.
The chart shows a study conducted several years ago that demonstrated more trading activity does not result into more profits. It is why it is crucial to understand the systems you trade and the activity you are producing. I always ask why one wants to trade? Most will answer to make money. Unfortunately many trade for the activity and others become addicted to the game.
I recently did some work for a trader that had to make over $60,000 per year to break even. That is correct, his commissions we over $60k for one year. He had lost a little over $23,000. His trading was profitable in the tune of $40,000 on a $150,000 account. This was a little better than 25% for the year. As in any business we have a cost to conduct that business. In the end he lost over $23,000. Of the trades that were made we indentified to best of our ability that about 60% of these trades were totally unnecessary. We were able to tag these trades as impulsive trades and never should have been made. This was a savings of over $35,000. He was down $23,000 for the year after commissions. He was not trading as poorly as he thought when he had a viable trade setup. He was simply trading too much and out of boredom making three to four times more trades than necessary. The only person that gets paid for your activity is your broker. I am sharing the info with his permission as he hopes it will help other traders.
I recently finished a two week trip working with clients and holding an Organization class in Florida. It was a great trip and offered me a chance to interact with a variety of clients and traders. I heard stories from those that struggled the last 6 months and lost thousands of dollars, to those that are gearing up to take more control of their investments/trading, to those that are preparing to take the next step in their trading journey, those that are unhappy with their activity and have not made many trades, to a few that are content with their accomplishments and preparing to wait for the next opportunity.
Of all those that I met and worked with the past two weeks I found a common denominator to those that were profitable and those that were not. The more activity one had the more they had lost, the less activity they had the more profits they had kept and was making money. There were those that had not done any trading to speak of, but those were traders that were gearing up to begin to take the next step.
We must have activity to make a profit, but there seems to be a balance between activity and profits/losses. There is a threshold when crossed we begin to lessen our ability to make a gain. That balance is difficult to find and can vary from trader to trader. The common thread was evident. Trade too much and profits became more difficult to earn and much more difficult to keep.
Another common trait I saw was a clarity of what a trader was looking for. Those that had more clarity in what they were looking to trade seemed to have been more profitable and those that were attempting too many styles and strategies seemed to be treading water or running on a tread mill.
This is not a post to say anything negative about those that I met and worked with. It is a post to re-iterate and confirm what occurs in the real world of trading. Remember there are those (brokers/vendors) that want you to be more active and offer you more of everything. In my personal trading and having the opportunity to see other successful traders, I look for the commonality of a theme. The theme is a balance of activity with a clarity and patience to wait.
Like the chart suggests, the more activity the trader had the less the trader was making. Don’t get me wrong, we have to have a certain amount of activity. That activity can vary based on style and strategies traded. The important element here is we understand what that activity should look like and keep our finger on the pulse so we do not cross that line by an extreme amount.
Do you know what your average activity should look like? Are you trading 200%, 300%, or maybe even 500% more than you should? There is a reason why brokers make it so easy to make a trade.
You want to take trades when you indentify that the probabilities are mostly in your favor. High probability trades with low risk opportunity is what a trader should strive for. These opportunities do not come across as often as we would like to think. In the end it is the bottom line that counts, not if we make a gazillion trades a year.
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