Over-Trading

Over-trading fits in under the topic of risk management. We are talking “risk control.”

First, I would say that risk management is one of the most important things that you really need to understand.

Second, you must begin to under-trade, under-trade, under-trade.

Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade 3 to 5 times too big. Other than on spreads, they are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

The principle of preservation of capital implies that before you consider any potential market involvement, risk should be the prime concern. You should consider the potential reward, only in the context of the potential risk. Risk must become the determining factor in taking a position. This is the true meaning of risk/reward analysis. Properly applied, it sets the standard for evaluating not only whether to take a trade at all, but also to what degree. Preservation of capital—'refuse to lose'—becomes the basis for smart money management.