About Over-trading and Under-trading

When volatility picks up, we should become less active and move slower. Hedge fund manager Frank Teixeira has good anecdote on the subject (ht midnight trader)

Most people think that Titanic sank because it hit an iceberg, when the real reason was because it was traveling too fast. The Titanic was traveling at a high rate of speed when it crashed into that iceberg. The ship was plotting a course through freezing waters. It was dark. Yet it didn’t alter its speed. Not exactly a great strategy– and certainly not smart risk management…

Many trading issues come for two reasons – over-trading and under-trading. Over-trading comes when we chase sloppy setups in unfavorable market environment. Since losses are more frequent and winners are smaller, it is easy to justify that trading more and bigger should compensate. The end result is usually a big drawdown. And what happens after a big drawdown? People are so scared to trade that they miss perfectly great trading opportunities when they start to arise. Equity selection, pattern recognition and risk management are essential stepping stones of consistently profitable trading, but they are not enough. Knowing when to be super aggressive and when to stay down is half the battle.