Thread by @RajarshitaS, 𝐎𝐯𝐞𝐫 𝐭𝐫𝐚𝐝𝐢𝐧𝐠 – 𝐓𝐡𝐞 𝐬𝐢𝐧𝐠𝐥𝐞 𝐛𝐢𝐠𝐠𝐞𝐬𝐭 𝐫𝐞𝐚𝐬𝐨𝐧 𝐨𝐟 𝐭𝐫𝐚𝐝𝐞𝐫’𝐬 𝐟𝐚𝐢𝐥𝐮𝐫𝐞!Charlie Munger, legendary [...]

𝐎𝐯𝐞𝐫 𝐭𝐫𝐚𝐝𝐢𝐧𝐠 – 𝐓𝐡𝐞 𝐬𝐢𝐧𝐠𝐥𝐞 𝐛𝐢𝐠𝐠𝐞𝐬𝐭 𝐫𝐞𝐚𝐬𝐨𝐧 𝐨𝐟 𝐭𝐫𝐚𝐝𝐞𝐫’𝐬 𝐟𝐚𝐢𝐥𝐮𝐫𝐞!
Charlie Munger, legendary investor and long-time business associate of Warren Buffet is regarded as one of the sharpest mind with multi-disciplinary deep-dive

understanding of various subjects. Carlie’s wisdom is profoundly applicable in trading as well. One of the famous quotes of Charlie goes as follows - “All I want to know is where I'm going to die, so I'll never go there”.

𝑰𝒏 𝒕𝒉𝒊𝒔 𝒕𝒉𝒓𝒆𝒂𝒅, 𝒘𝒆 𝒘𝒊𝒍𝒍 𝒕𝒓𝒚 𝒕𝒐 𝒖𝒏𝒅𝒆𝒓𝒔𝒕𝒂𝒏𝒅 𝒕𝒉𝒆 𝒗𝒂𝒓𝒊𝒐𝒖𝒔 𝒑𝒊𝒕𝒇𝒂𝒍𝒍𝒔 (𝒑𝒐𝒕𝒆𝒏𝒕𝒊𝒂𝒍 𝒅𝒆𝒂𝒕𝒉 𝒛𝒐𝒏𝒆𝒔) 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒕𝒓𝒂𝒅𝒆𝒓𝒔 𝒂𝒏𝒅 𝒉𝒐𝒘 𝒕𝒐 𝒐𝒗𝒆𝒓𝒄𝒐𝒎𝒆 𝒕𝒉𝒆 𝒔𝒂𝒎𝒆 – 𝑶𝒗𝒆𝒓 𝑻𝒓𝒂𝒅𝒊𝒏𝒈.

People flocks to trading as get rich mechanism and in pursuit of higher profits they often overtrade. At the outset, I would like to explain that there exists a difference between trading often and over-trading.

In a layman’s language, the term – ‘Over’ would means - something which is out of bounds. Thus, in trading parlance, Over-trading can be summarised as – (A) Any trade which is out of bounds of your trading set-up.

(B) Any trade or cumulative number of open trades has higher than envisaged risk associated. Thus, over-trading has nothing to do with holding period or number of trades.However, having said that trader’s attention span, temperament (fear/greed balancing ability),

confidence and deviation from discipline could push her towards over-trading. This in-turn passes the un-necessary blame of over-trading on the number of trades taken or holding period.

Due to lack of temperament, confidence and discipline, a trader could get perturbed easily by small losses. This could result in deviate from the trading plan, which in turn leads to sub optimal trades and sub optimal execution of the same.

The term sub optimal trades encompasses – revenge trade as well as trades outside your trading plan.Sub optimal execution of trades here envisages holding the trade longer or shorter than profit/risk envisage.

Thus, if you think overtrading is just a problem for newbies, you’re wrong. At the opposite side of the spectrum is a confident trader, who has string of strong wins and greed of making in yet another profitable trade pushes him to take trade outside his trading plan and makes

him hold the loser longer than envisaged. Over-trading manifests due to both lack of confidence as well as excess confidence.

𝗛𝗼𝘄 𝘁𝗼 𝗶𝗱𝗲𝗻𝘁𝗶𝗳𝘆 𝘄𝗵𝗲𝘁𝗵𝗲𝗿 𝗮 𝘁𝗿𝗮𝗱𝗲𝗿 𝗶𝘀 𝗼𝘃𝗲𝗿-𝘁𝗿𝗮𝗱𝗶𝗻𝗴 (𝗳𝗼𝗿 𝗼𝗻𝗲 𝘄𝗵𝗼 𝗱𝗼 𝗻𝗼𝘁 𝗺𝗮𝗶𝗻𝘁𝗮𝗶𝗻 𝘁𝗿𝗮𝗱𝗶𝗻𝗴 𝗷𝗼𝘂𝗿𝗻𝗮𝗹 𝗼𝗿 𝗼𝗻𝗲 𝘄𝗵𝗼 𝗱𝗼 𝗻𝗼𝘁 𝘁𝗿𝗮𝗱𝗲 𝗯𝗮𝘀𝗲𝗱 𝗼𝗻 𝗴𝗿𝗮𝗱𝗲𝗱 𝘀𝗲𝘁-𝘂𝗽𝘀)

(A) If you are using all margins limits provided by broker (B) if you are getting worried as the trade goes against you (C) If trader resorts to sub optimal exits by holding losers too long and cutting winners to early

(D)Revenge trading – If you trade in order to recover the lost money, you are destined to over trade.(E) Transaction cost as % of profit/loss – For a trader who is severely over-trading, his transaction cost as % of profit/loss over cumulative trades would remain at elevated Lvs

𝗛𝗼𝘄 𝗱𝗮𝗻𝗴𝗲𝗿𝗼𝘂𝘀 𝗶𝘀 𝗼𝘃𝗲𝗿-𝘁𝗿𝗮𝗱𝗶𝗻𝗴? - If a trader has capital of Rs0.25mn and using derivative segment, if she buy/sell the stock futures worth Rs1mn at same price and executes 3 trades in a day . Despite, not losing at gross levels due to brokerage,

exchange fees, STT and other government levies, he/she will wipe out capital within just 182 trading sessions (assuming brokerage at 0.015%). Thus without doing anything wrong at individual trade level, the cost of transaction cost itself explains the perils of over trading.

𝗪𝗵𝘆 𝗱𝗼 𝘁𝗿𝗮𝗱𝗲𝗿𝘀 𝗼𝘃𝗲𝗿-𝘁𝗿𝗮𝗱𝗲 –– (A) Revenge – In order to make good the loss (B) Greed/ feeling of being invincible (C) Action-Bias. The First two are self-explanatory,also discussed above, the third one, Action-Bias explains the concept of lack of mindfulness.

In an interesting research paper, Michael Bar-Eli, analysed 286 penalty kicks in soccer. The analysis revealed that ball takes approximately 0.2 seconds to reach the goal. Thus, the reaction time is almost absent for the goal keeper to react.

Thus, on 6.4% times, the goal keeper was successful by choosing right or left dive and 80% of the times, penalty kicks resulted in a goal. . Thus, despite remaining at centre being the most productive option, the Goal keeper chooses either right or left in order to justify

his action to save the goal, despite the action yielding limited benefits. Staying at centre is psychologically considered as inaction, which may result in regret and risk to his career. Similarly, trader, needs who feels the need to be in the market, also suffer

from the action bias. Thus, traders need to becomes more mindful and keep on reminding themselves - “Decision to be out of action, itself is an action” to overcome Action-bias.

𝗛𝗼𝘄 𝘁𝗼 𝗽𝗿𝗲𝘃𝗲𝗻𝘁 𝗼𝘃𝗲𝗿-𝗧𝗿𝗮𝗱𝗶𝗻𝗴? –(A) Overnight preparation and creation of watch list – helps in great focus and control over mind. (B) Plan your trade and trade your plan – Risk reward of the individual trade helps in weeding out the risky trades

(C) Trading checklist – To prevent impulsive decision marking, overcoming boredom and selection of Grade A+ set ups. (D) Journaling and review of trades executed. (E) Trade sizing – If trader has well diversified trading portfolio,

the outcome of each and every trade will not have significant impact, which in turns leads to prudent trading decision. Thus, trade sizing and diversification also helps in preventing over-trading. To conclude, as the legendary trader – Jesse Lauriston Livermore says –

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!

This spells out very clearly the need to sit tight – which is nothing but to adhere to trading plan and stop over-trading. so if you all can resonate with this thread please show some love and RT it for max reach !! Thanks Guys

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