The Minimalist Trader: OVER-TRADING

• Posted by chicagosean
• on November 17th, 2010

-

Much like the old saying about casinos in Las Vegas, Wall Street won’t be handing out those “two-comma” bonus checks this January because they are good at letting YOU make money.

Among the many things they are good at is providing you with all kinds of bells and whistles and heat maps (!!!) to trick you into thinking you’ve got the inside line on the next three point move in $AAPL. “Cheap” commissions are expertly and “generously” offered to you as an enticement to pump up your volume. Babies are paraded across your television screens during Monday Night Football to show you how “easy” it is to take control of your future via well-timed trades from your smartphone.

I’m not going to break any new ground here by announcing that over-trading is detrimental to your fiscal and mental health.

Yes, commission rates for the retail trader have plummeted since I began in 1998 and on the surface that looks like a good thing. But too many retail traders have abused their cheap commissions in the form of rapid and unnecessary trading.

I can give you a personal example. During a stretch of time in 1999-2000 when the Nasdaq kissed 5400 and then shed 65% of its value in what felt like a blink of an eye, I was a daytrader at a trading arcade in Tampa, Florida. Amongst my colleagues, my volume of trades was probably in the lower end of the daily range in our office, but I was routinely trading 100,000 shares each and every day on a $50,000 account. And this volume typically rang up commission charges in excess of $1,000 each day! This means that over the course of that year, I easily paid more than $200,000 in commissions – four times the equity in my account! When I think back to those days, its almost surreal to think about that. I paid more in commissions than I earned in trading profits that year.

This is great for whichever commission house holds your account. But this is terrible for you.

To be a Minimalist Trader, we need to seek out trading strategies and ideas that are long on potential yet short on activity. There is no right strategy for everyone, but there are certainly strategies to be discovered that are right for you. Quality, not quantity. Most of us trade on screens – we aren’t on the floor anymore. Take advantage of the distance between you and the market. You can easily step away and get a better view.

My current strategy involves trading weekly options and holding the position for seven days until expiration. I essentially only enter and exit trades at the close on Fridays. This accomplishes a number of things: First and foremost, my commissions are a non-factor. Secondly, I’m not glued to my monitors for 8 hours a day, fixing my eyes on flickering lights and doing unknown long-term damage to my eyesight. Thirdly, the mental capital I preserve by not stressing out about every tick in the market pays dividends everywhere else in my life. My wife says I’m much more calm and relaxed these days (win!).

All of these benefits and more allow me to channel my energies into additional pursuits (this blog for example) which compliment my business and my life. This is what freedom is. This is why I like being a Trader. This is why becoming a Minimalist Trader is right for me and can be right for you.

So far we’ve discussed two enemies of the Minimalist Trader: high overhead (click if you haven’t already read), and over-trading. Next in this series, I will discover the psychological warfare traders wage against themselves by “trading with the rent money.” Keep an eye out for the post later this week or weekend.

-

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus