The Single Best Tool I Use To Avoid Overtrading

This week, I’m going to discuss what is likely the most common and pernicious aspects of being a day trader: overtrading. While trading too much might not seem like a problem at first blush, I often find if I trade more than five or six positions in a single morning, I'm probably not having a great day.

While there’s no one-size-fits-all solution to overtrading(apart from getting up and walking away from your trading desk), there are steps you can take and strategies you can implement to make sure you’re not cycling your capital for lack of anything better to do.

Not coincidentally, I’ve run up against this problem a few times recently. I just posted a recap video for January on the Warrior Trading Youtube account where I discussed the record-setting $12,000 in fees and commission I incurred because I was taking so many positions. Needless to say, that wiped out my gains for the month across my main accounts.

Then, this past Thursday I experienced another aspect of overtrading when I tried to dig myself out of a $2,000 hole. What’s really upsetting is that I basically did get back to nearly breakeven, but I kept pressing on hoping to get in the green and ended up in the red by more than $4,000 across 13 different tickers.

The reason why overtrading is such a persistent problem is that each of those examples stems from a different impulse. Throughout January, I was taking advantage of a healthy amount of momentum through the month. While that helped me post some big green days, it also meant I was moving in and out of stocks like a madman looking for the next breakout. As for Thursday, I was just chasing an arbitrary goal of keeping my green streak alive and ended up wiping out my profits from the previous three days.

Like I said, there’s no single solution to over-trading. Exercising some self-awareness is obviously helpful, as is setting limits to how many small wins or losses you’re willing to take on before walking away.

However, the most concrete step you can take to making more deliberate trades is to become more sophisticated in your use of stock screeners. It’s not a coincidence that I start every trading day looking at my morning gap scanner for which stocks are up in the premarket. I’m also keeping an eye on my momentum scanner for stocks that are jumping during the session.

Although I recommend traders use these same metrics for finding good trading setups, the best stock screeners are built so that traders can prioritize stocks that resemble those they have the most success trading. That’s how I created my screeners, and how I hope most of my students have customized theirs.

Once you fine-tune your screeners and start understanding how to read them and utilize them, you’ll gain a better appreciation for which stocks are worth trading and which are simply not in your wheelhouse.

Of course, this still requires patience and self-control, particularly when the stocks you like just aren’t popping up on your scanners. And while experimenting with new setups or different market conditions could help broaden your trading universe, staying focused on stocks you know you can trade profitably and keeping with your core competencies through the use of a scanner are your best bet in making the most of whatever trades you take.