Have you ever found yourself feeling overwhelmed and lost when you’re trading? Every time the market shows any likeness of something that even remotely looks like what you usually trade, you open a position in haste.
Eventually, this sort of trading eats your account balance rapidly, making you miserable and opening the gate to the whole variety of other kinds of destructive behaviors. If it’s all familiar to you, you’re a likely victim of overtrading.
How to stop overtrading
Fortunately, there is an easy and straightforward answer to that. You must find your niche! If you know what you’re looking for in the markets, you won’t have a reason to be caught up in chasing the market by placing too many low-quality trades.
In the previous article, we briefly touched on the topic of focusing on a specific niche. Here we will get deeper into finding the niche that suits you. Overtrading is something traders must learn to deal with as early as possible in their careers.
Otherwise, even if a trader keeps overtrading but still manages to stay somehow profitable, it will be nearly impossible to achieve truly remarkable results – that is only possible by trading in the zone.
Four ways to understand your niche in trading
People possess very different sets of personalities, lifestyles, and schedules. For this reason, the only way to be consistently profitable in trading over the long-term is to align how you trade with your life. When you’re entirely comfortable with the process of trading, you’ll get access to the best quality of the market judgment that’s available for you at the moment, hence, making excellent trading decisions.
Let’s look at the four key ways to specialize in trading.
The Universe of the financial markets is immense. Just because you’ve heard that somebody makes good money trading gold, for example, doesn’t mean you’d do well in gold too.
You can follow a tailored strategy, but you can’t follow a tailored personality of another trader that fits well to the gold (or any other) market! You must be YOU in trading, just like in any other endeavors.
Different markets are active at different times. Depending on your time zone, you’ll be physically comfortable trading one market over others. If you live in North America, I don’t think it will be comfortable for you to wake up at 3:00 AM to trade European openings, although there are often nice breakouts at that time.
You may be personally interested in a particular asset class, and your zeal will motivate you to learn all ins and outs of that instrument. Say you’re fascinated by Scandinavian countries. You will have a genuine interest to learn deeply about the exotic pairs USD/NOK and USD/SEK, that will go well beyond a basic wish to make money.
There are thousands of trading strategies that different traders use. Some traders like to follow long-term trends, and others focus on short-term sentiments. People with a more contrarian mindset tend to trade reversals. Trading strategies go far beyond solely chart based approaches. Traders also may base their trading decisions on fundamental factors, market seasonality, mathematical laws, etc.
You need to find a strategy that fits your personality, where you feel comfortable trading it. For example, if you feel highly anxious about shorting the market that’s euphorically flying to the moon, then probably reversals are not for you.
Try different trading approaches and pay attention to how you feel about executing them. It’s important to stay focused on your personal attitude to the trading approach rather than thinking about what kind of money it generates.
Chart timeframes are one of the most important factors that determine your niche. Depending on the timeframe, your trading will be more or less intensive.
Some people like the idea of scalping, which is a fast-paced style of trading attempting to catch small, high-win rate setups typically multiple times during the day. But when it comes to actually trading it, they are having a hard time following the rules and keeping up with the fast pace of decision making.
Then, the same people try out swing trading, using 4 hour or daily charts. Suddenly their performance may improve as their mindset matches better with a slow strategic approach.
If you can’t stomach the idea of holding a position overnight, then probably swing trading isn’t for you, and you better stick to day trading.
Type of rules
If the first three keys all traders might hear about from time to time. The definition of the type of rules is often overlooked. We know that we must have rules in trading.
The black and white rules
If you ask a person, say with an engineering background, to share his or her perception of the rules, it will most likely be either A or B, black or white, right or wrong. For example, the “black and white rule” trader may have a rule that he or she has a buy signal when the price goes above the previous weekly range.
Once anybody for whatever reason buys at any price above the previous week’s range, the trader will unquestionably buy along.
More systematic and math-oriented traders would have an easier time following the “Black and white rules.”
Let’s say there is a second trader with the previous week’s similar breakout rule, but the rule is the guideline type. Once the price goes above the previous week’s high, it won’t be the only necessary evidence for such traders.
The trader might consider some additional factors, like the amount of trading volume during the breakout or whether it happened during the active hours of the instrument.
Guideline rules tend to appeal to more of a discretionary type of traders, who like flexibility and more control over their decisions.
The easiest way to stop overtrading is specialization. Professional traders wait patiently for the specific trades that have the highest odds of success in their trading strategy.
If you fail to keep trading within your niche, eventually, you will miss your best trades even if you seem available to trade them! If you take the wrong trades outside of your niche, and you lose money, you’re likely to miss the trade that you’re best at because you’re already exhausted by the losses from the previous trades that are outside of your niche.
To know your top trades, keep notes in your journal about your trading. To help you with that, check out the previous article, which focuses on the trading journal.