There is a tendency amongst newer and inexperienced traders to over-trade. There is no set number of trades that any particular trader should be taking. However, if you are not selective with the trades you take, you will take trades that are more likely to fail than become successful.
So, what exactly is overtrading? Well, I define overtrading as taking a position in the markets, either trading or investing, without having planned and evaluated the trade itself. Many traders tend to jump into a security just because it is moving. Their emotions take over and the fear of missing out on potential profits forces them to chase price just before it turns sharply against them.
Business television doesn’t help the situation either. Most of the shows either play on your fears by discussing the “missed earnings,” or biggest price drops of the day. Or they appeal to your greed by touting the securities that have already run up tremendously in price. Instead of bowing to these emotions and falling prey to professionals by trading against them, learn the tricks they use to separate you from your money.
When I was a student at Online Trading Academy, I learned about a dirty little trick that the market makers would use to earn extra money from intraday trading at the expense of the unknowing public. If you have ever been to a pond or lake with ducks and brought some bread to feed them, you know that when once the ducks know you are carrying food they will follow you wherever you move.
If you have ever traded intraday you have probably noticed that during lunchtime on the East Coast, (noon to 2:00pm EST), stock prices usually go flat. This sideways movement can be frustrating, especially if you are waiting to enter into a position.
The market makers are also waiting for something to happen so they too can make money. If prices continue to move sideways during this two hour period they will not make money unless they take some action. Since there is usually very low trading volume during the lunchtime session it does not take much buying or selling to push prices out of the sideways range.
A market maker, with a little bit of buying, can push prices upward out of the lunchtime range. This is akin to a person putting out a trail of breadcrumbs for the ducks. When the ducks, I mean novice traders, see the breakout they start to buy and volume increases.
The market maker then sells to the novices for a profit. The market maker will usually continue to short to the buyers and after all of the buy orders have been absorbed prices fall to the lunchtime lows.
The same can also happen with a breakout to the downside during lunchtime basing. The market maker will short the stock until novice traders start to sell or short the breakdown from basing. The market maker will buy to cover their shorts and fill the novice sell orders. The price will usually rise once the novices’ orders are completed.
There are other variations of duck feeding such as the following example: the stock, BBBY, was in an uptrend but lost volume and momentum during lunch. When the market makers pushed prices to a new intraday high the novices jumped in greedily only to see their profits vanish as prices collapsed to demand. As a patient trader, you could have waited for the demand zone to be tested on the stock and made a great profit buying there.
Not everyone will be able to make profits from the Feeding of the Ducks. You usually need to have a larger account in order to buy or short enough stock for a decent profit. But at least knowing that this can and does occur regularly can keep you from entering into a position that would have caused you to lose money and that can be much more valuable!