Overtrading can be a killer to your P/L. The trick is to trade
consistently and always know what the markets—and your positions—are doing.
Did you put up a trade today? If not, did you at least know how your positions were doing? The term “trading” doesn’t just refer to placing an order. Think of a market maker who “trades” on the floor. She may have spent most of the day waiting for an order to come in. But while she’s waiting, she’s well aware of her open positions and how key futures like /ES, /NQ, and /ZB are performing. She’s fully engaged, and that’s also what trading is about. The more you’re aware of the various moving parts, the sharper and more focused you’ll be.
Let’s be clear. Actively buying and selling stocks, options, or futures without a strategy is a great way to run up commission costs and drive your account value to zero. So, the goal is not blanket buying and selling. The goal is thinking about how to become more engaged with the market. It’s about implementing an investment strategy consistently, with discipline.
Say you want to become a better golfer. You could read magazines, watch videos, or try out those cool electronic simulators. But still, there’s no substitute for feeling the texture of a course, driving and putting in the sun and rain, dealing with messy sand traps, and the other influences that will shape and deepen your game. Ultimately, you can only get great in real time.
If you’re active in the market, it doesn’t mean you’re guaranteed profit. You must still deal with risk and loss no matter how much time you have on the trading “course.” The point is, you start to build critical habits. You deal with the ups and downs the market throws at you. You swing at a few trades. Some you hit. Some you miss.
Say you’re hitting your engagement marks— monitoring your positions, your P/L, current prices, account value, and more. You may even understand and employ certain strategies like verticals, covered calls, iron condors, and so on. You know how these strategies make and lose money. But maybe your account isn’t generating the returns you’d like to see. How do you improve your results? Consider four scenarios that may relate to your lower returns and how they can be rectified with active engagement.
ANALYSIS. We’ve all been there, and it’s discouraging. It’s like shooting a great 16 holes and beating your handicap, only to shank and slice right into the water traps in the last two. Of course, there’s no foolproof strategy to make sure a winning trade never loses. But unlike those water traps, in the market you may be able to free yourself from those pitfalls.
ACTIONS. Make it a habit to log into your account through the TD Ameritrade thinkorswim® platform and check your positions every day. Look at the daily P/L of your positions by going to the Monitor tab in the Position Statement section. Above all, know which positions are winning and losing. If you have a trade on with a profit, consider using a stop market or stop limit order with a trigger price that may help protect some of that profit if the trade falters. A stop order is no absolute guarantee of profit, and you can incur commissions. But it could unwind some of the position and prevent a winner from becoming a loser.
Stop Market Order. Upon activation, a stop market order becomes a market order. The benefit of a stop market order is that it will seek immediate execution once the activation price has been reached. The disadvantage of a stop market order is that the client does not have any control over the price at which the order executes. There is no guarantee the execution price will be equal to or near the activation price.
Stop Limit Order. An order to buy or sell a stock that combines the features of a stop order and limit order. Once the activation price is reached, a stop limit order becomes a limit order that seeks execution at the specified limit price or better.
The benefit of a stop limit order is that the investor can control the price at which the order can be executed. However, a stop limit order also carries the risk of missing the market altogether because it may never reach or it may surpass the specified limit price. In a fast-moving market, it might be impossible to execute an order at the limit price, so you may not have the protection you sought.
ANALYSIS. Think deer in the headlights. A losing trade in your Position Statement will surely get your attention, but it could make you freeze—just like how you stare at the golf ball you just hit as it drifts away from where you want it to go. Helpless. But engagement makes a difference.
ACTIONS. For starters, acknowledge the loss. It’s real. It’s happening. Can you think of something that’ll reduce the loss without adding to the risk? If you are an options trader, is there a call you can sell against long stock to reduce the stock’s breakeven point? If it’s an iron condor that’s losing because the stock has dropped below its short put strike, could you roll the short call vertical side to lower strikes to collect more credit, and potentially reduce the iron condor’s risk?
Be creative. You don’t necessarily want to add to a losing position. Check out the Trade page on the thinkorswim® platform and look at the options available for that stock or index. Is there an options strategy in the same expiration as the position, or even in a different expiration that could offset the loss? Finally, is there an unexpected reason the trade is losing money? Maybe it’s not just the stock price moving against it. Maybe a change in volatility or time is hurting it. Maybe the position is too big. In a word, take an honest inventory. Give the loser a long, hard look—the position’s greeks are on the Position Statement. See how implied volatility might have changed by looking at the ImpVolatility study on Charts. Is there something to avoid in the future?
ANALYSIS. Rely on criteria that let you separate bad trades from potential opportunities. That criteria could be something like reward versus risk. Or positive theta and defined risk. Or strong financials and diversification. You might also consider charting patterns and technical analysis if that’s your thing. Your goal is not perfection. Should you add too many variables, you might never find the right spot to dive in. Do your homework but avoid waiting for a perfect opportunity that may never come.
ACTIONS. Above all, it becomes a question of how much confidence you have in your core strategy. Use the papermoney® platform in thinkorswim (Figure 1) to experiment with trading without real money. It allows you to put on that not-quite-perfect trade and gauge its progress. This practice run could help you refine your approach, kind of like the golfing simulators that let you swing a real club as you watch a digital ball. If you make a mistake, you hit the reset button.
FIGURE 1: LOOK FAMILIAR?
It should. The paperMoney trading platform in thinkorswim is just like the real thing— almost. You can test your not-so-sure theories without risking real money. Source: thinkorswim by TD Ameritrade. For illustrative purposes only.
ANALYSIS. This pops up in trading often. Markets are infinitely complex. You can always ask one more question about a stock, company, or strategy. If you could just answer one more question or run one more test, you’d do the trade. This is related to number three above, but there’s a difference. Your indicators line up, but you’re still not going to put on the trade. At some point you may need to put on a trade.
ACTIONS. Look at your account’s Net Liquidating Value (Account Info section) in the upper left-hand corner of thinkorswim. The “net liq” shows how much your account is worth. Now assume a potential trade has a max possible loss. If you don’t know what the max loss is, load the trade up as a simulated trade on the Analyze page to find it. Now divide that max loss by the net liq of your account. What’s the percentage? This puts the potential loss in perspective. If your net liq is $5,000, and the max loss on a short vertical, for example, is $70, the loss would represent 1.4% of your account value, not including commissions. You don’t want to lose 1.4%, but is that a risk you can accept for a given strategy? If you have confidence in your strategy, you should be able to answer that question.
If you do more than just trade and pay attention to the underlying conditions of the trading course (as it were), you’ll build knowledge, experience, and a much deeper understanding of how the market expresses itself. It doesn’t guarantee profit, but over time, you can gain a certain amount of expertise, wisdom, and instinct.
It’s not always just about buying and selling, but about how you take control of the investment process. If it’s sunny and windy, your trading “ball” could end up in the next county. Be prepared.
Don't sit around waiting for the perfect opportunity to come around. Log in to your thinkorswim account to set alerts on everything from price targets to drawings. Log in to your thinkorswim® account and go to Alerts in the Market Watch tab to set up your notifications.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
The covered call strategy can limit the upside potential of the underlying stock position, as the stock would likely be called away in the event of substantial stock price increase. The paperMoney® trading application is for educational purposes only. Successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period as market conditions change continuously.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.