Trading offers you incredible freedom of choice. You have almost complete control over when and where you will take on risk. And of course, how much risk.
But while this freedom is great in theory, it's potentially devastating for many who are still searching for their edge.
I suspect MANY developing traders would find that there is great power in applying limits to this freedom.
I was chatting in recent weeks with a trader who made this breakthrough. His problem was a common one – overtrading. In particular when in drawdown, where he would keep grinding the session deeper and deeper into negative territory.
It was always obvious with the benefit of hindsight that he was out of sync with the price movement. The smart decision would have been to stand aside. But he was unable to accept this at the time, always sure that the next trade would be the one to turn everything around.
His solution… self-imposed limits to his trading.
Not just when in drawdown.
Feel free to change this to any other number which suits your needs. Maybe you'll prefer two. Maybe four or five.
All are fine, provided it's MUCH LESS than the typical number of trades you take each day when allowed free reign.
This provides are two key advantages.
Limiting the number of trades each day:
- Allows you permission to wait for QUALITY trade ideas.
- Limits the potential for deep drawdown through overtrading while out of sync with the market action.
Let's demonstrate through a hypothetical example:
"My Trade Plan – Today is FOMC Day, with the FOMC Statement due at 14:00 and the Press Conference at 14:30. I will stand aside prior to these events due to the increased potential for unfavourable price movement. From 14:30, I will seek a maximum of three trades only, noting that my best performing setup in post-news environments is the first pullback following commencement of a new directional trend (like demonstrated here)."
With great freedom comes great responsibility. (Thanks to Voltaire, Eleanor Roosevelt, Stan Lee and the many others who have expressed this idea in numerous forms!)
If you find yourself struggling through too many poor trade ideas, consider applying limits to your trading activity.
Allow yourself three trades per day.
Maybe the solution to finding your edge will come through a focus on QUALITY rather than QUANTITY.