1. Before each trade, clear your mind.

As I was flipping through channels, I came upon an interview with a surfer. He was saying that he knew a big surf would come and he would go underwater. The interviewer asked, how does he handle it? He said, it is simple. If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.

What does surfing have to do with trading? Well, especially when the markets are choppy, if you overtrade, you could lose all of your capital. However, if you take a moment and think about your trades, you can have much better results.

2. Have a trading plan and stick to it.

Plans are roadmaps. You want to know where you are headed. Think about it. If you are having a surgery, you want your surgeon to know why he is performing the surgery, where he should start, and what is the expected outcome.

In order to stick to your plan, think about your plans/rules as giving your word. Usually, we associate giving our word as a contract and we do not break it with others.

However, this rule does not apply to ourselves. So treat yourself as well as you would treat your best friend, and keep your word to yourself.

3. Look at each trade as an individual transaction.

Ask yourself:

If this was the first trade of the day, would I get into it?

What would be the initial size of this trade?

Do not look at an individual trade to make up for all of your losses.

4. Create a routine that works for you.

We are creatures of habit. As Aristotle says, “We are what we repeatedly do. Therefore, excellence is not an act, but a habit.”

5. Come from abundance.

There are a lot more opportunities. You will get what you expect. You might have heard of the following:

Imagine going to the ocean and taking water from the ocean. You can use a thimble or you can use a huge tub. You can do it once or as often as you want. It does not matter to the ocean, it is up to you and what you think you deserve.

6. Be patient – look for the right opportunities.

As the saying goes, there is a lot of fish in the sea.

7. Keep a daily journal.

To start with, keep track of:

Where you got into the trade

Where you exited the trade

Why you got into the trade

Why you got out of the trade

After a while, you’ll notice your own patterns.

8. Remember, this is a process. It takes time and experience. Rome was not built in one day.

9. Reward yourself.

I know this might sound counterintuitive. A lot of us wait to celebrate and reward ourselves till we do things perfectly. We think that if we start celebrating the intermediate steps, we’ll become complacent.

The truth is, to create a new habit, we need encouragement. Imagine a baby who is just starting to walk. S/he takes his/hers first step and then falls down. What do parents do? Do they yell and punish the child, or do they encourage and celebrate his/her action? If you said the latter, you are right.

Usually, encouragement works much better than punishment. The idea of celebration is to encourage ourselves.

Trading is simple, but not easy. The greatest difficulty is to accept the simple rules and follow them with discipline.

To summarize, the 9 steps to prevent overtrading are: (more…)