Treat the Disease, Not the Symptoms
I’ve recently been involved in a discussion on the StockTickr blog on the subject of trading mistakes. The question of the original post is whether it’s a worse mistake to overtrade or to undertrade. In the case of the former, we’re talking about taking bad trades, while in the latter it’s about not taking good trades. So the kind of bottom line question is whether it’s worse to lose money by taking bad trades or to lose out on profits because you skipped good ones.
A few different opinions were voiced on one side or the other, but I say you need to take a bigger view of the subject. To my mind (and Brett Steenbarger agrees), to try to answer the question at face value misses the more important mistake being made – not following one’s trading plan.
Think about it. If you’re taking bad trades – meaning your not waiting for good signals – or you’re chosing not to trade when your system tells you to, then you’re not following your system (and the same would be true if you traded larger or smaller than you should). As such, either “mistake” is only a sign of a larger problem. The real question which needs to be asked is why you aren’t following the system. There are, of course, any number of reason.
Looking at those “mistakes” by themselves is like a doctor treating a patient’s symptoms and not looking at the wider view to try to see if there’s a deeper problem.
Why are you skipping those trades? Is it because you don’t trust your system? Are you over-trading because the system isn’t providing enough trade signals for you? If you can address those issues you can work on the route cause for your over/under-trading and it won’t be an issue anymore.
So if you find yourself having a problem like this, make sure you step away from it and try to find out what the real problem is.
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