One thing that all traders will eventually need to consider is how frequently they should trade. Will they make one trade per day, 100 per day or more? While deciding how often to trade may just happen naturally, all traders should stop and evaluate how much they are trading and if they are possibly undertrading or overtrading their specific style or system. Scalping styles generally require lots of trades, while position traders need to be more selective in the movements they trade. Each style is different, and too many or too few trades could potentially harm a trader's profits.
Learn a Little About Yourself
The first thing you need to decide is what kind of trading you like to do. If having to watch every tick of the ticker and every change in the quotes would drive you crazy, chances are you don't want to be a scalper. If you like the high pace and being highly involved in the market every second of the day, scalping could be the way to go. If you like doing research or the idea of trading on news or major technical levels, you might want to do fewer trades and focus on long-term styles of trading.
You may also like the idea of finding a medium – not holding positions all day but not entering and exiting every few seconds or minutes either. You participate in the major part of a move, normally once it is already in motion (you can still do your research to find out where these moves might take place) and then exit as soon as it looks like the momentum may slow or shift. With this style of trading, you may make up to several trades within the day, depending on market movements.
Also, all traders have different restrictions or circumstances that will almost force them (at least temporarily) into one style or another, and scalping will generally not be the desired approach. Scalping requires extremely low brokerage fees, as the trader will have to make many trades, mostly for a small profit, and many may end up with many flat trades minus trade costs, thus resulting in a cumulative net loss. So unless traders can get their costs per trade down to a very low level, they may want to put scalping on hold.
Most traders starting out will need to do fewer trades to control their fees, but they will attempt to make more profit on each trade. This will entail doing research on what stocks will move the next day, scanning for stocks that have hit or are about to hit major technical levels, or stocks that will move based on economic data, news or other market-driving forces. Traders also have other commitments, sometimes other jobs or family responsibilities. The amount of trades being done should be congruent with other lifestyle choices.
Undertrading or Overtrading
A trader needs to be able see instances of undertrading or overtrading. Are traders giving up potential profits because they are not willing to enter a position when they see an opportunity, or are they wasting money racking up excessive fees? If a trader is undertrading, they will probably end up saying things like, "My trading plan says I should get in, and I didn't!" or "Why didn't I make that trade?" This is a clear sign of undertrading.
Overtrading can be harder to pinpoint, but if the trader is consistently making only a couple of dollars above commissions, or is making random trades with untested methods, then they are likely overtrading. Another sign to look for is exiting too early in a profitable move or placing stops too close to the entry price that prematurely exit the trader from a would-be profitable position. These will lead to increased trades and increased trading costs.
In both cases, traders need to structure a trading plan in such a way that will pull them away from these tendencies.
Use a Trading Plan
Every trader should have a trading plan. Entry and exit from stocks should not be random; there should be a reason behind each trade supported by the trading plan. Chances are, if a trader is overtrading or undertrading and a plan is in place, that plan needs tweaking. If traders are overtrading, they may need to make their entry and exit criteria more stringent or harder for the market to manufacture valid signals. When we add more criteria that need to be in place for a trade to happen, we will do fewer trades, but chances are that those trades will be more consistent and more profitable – although this is never a guarantee.
If a trader is undertrading, it is likely that there is no trading plan in place and is therefore missing opportunities. If the trader does have a plan, the current criteria for entering a trade are likely too restrictive. If a plan does not allow the trader to capitalize on major movements, it should be adjusted so that the trader can take part in these moves.
Do not cut off valid market opportunities because of a fear of losing. Develop a plan of attack for the markets. What needs to happen in order for you to enter a trade, and also what needs to happen for you to get out of a position?
The Bottom Line
All traders, regardless of how often they trade, should have a trading plan. After the trading plan is in place, we need to do a self-assessment of whether we are overtrading or undertrading within our plan. Based on these results, we can alter our trading plan to suit our needs and likely increase our profitability. If we are overtrading, we can make our trading plan more restrictive for entries and exits. If we are undertrading, we can relax our trading plan criteria to take advantage of potentially profitable moves in the market.