Short-Term vs Long-Term Trading

Discussions about personal psychology for the individual trader.
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Dave S.
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Short-Term vs Long-Term Trading

Post by Dave S. » Wed Apr 16, 2003 1:42 pm

It would seem that the long-term trading approach would be "easier" on a trader in terms of the stress involved in making trading decisions.

My experience has mostly been with short-term trading methods, and I found these to be very stressful due to the need to react almost instantaneously. My makeup is such that I like to analyze in depth (my wife acusses me of "analyzing things to death" LOL!), and I couldn't do this with, say, 2 seconds or less to make a decision.

This is one of the big reasons I'm very interested in exploring long-term trading, and perhaps those with a more balanced experience than mine could add their insights.

Thanks for any and all responses!

Dave

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"Easier" is in the eye of the beholder

Post by Forum Mgmnt » Wed Apr 16, 2003 3:47 pm

Dave,

You very well might find trading long-term easier. However, there are many that would say otherwise.

In general, shorter-term systems can offer better risk-adjusted returns but don't tend to work as well over many years. They will generally have better Sharpe Ratios, and often better MAR ratios than equivalent return long-term systems.

Long-term systems will also add the stress of having to watch your position profits evaporate over many weeks or months. Or the stress of having the market gap enormously overnight. It might be even more stressful to have your wife accuse you of completely wasting all the profits when your account goes from $100... to $60...

In short, I don't think one can say that one way is more stressful than another. The key, as you have identified, is to find a style of trading that fits your own personality.

You sound like someone who would be better off with a fully mechanical system where you can do the "in depth analysis" while building the system instead of while trading. However, this can just as easily be done for a shorter-term system; even one that doesn't keep overnight positions. This is especially true with the advance of communications over the last few years.

- Forum Mgmnt

P.S. My favorite is to combine all the timeframes so you have all types running at the same time. That's hard for an individual but pretty easy for a computer.

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combining timeframes

Post by Dave S. » Wed Apr 16, 2003 4:59 pm

Thanks for your comments

I found your idea of combining timeframes interesting - I've looked at doing this, too. When I was short-term screen trading, I'd look at the 5 minute time frames for entries, but use the longer time frames, such as 30 and 60 minutes, to get a feel for the "big picture." Lately, as I've been exploring longer-term trading, I look at the daily time frame, but check the longer-term trand using the weekly time frame. Is this the type of thing you're referring to?

Interestingly, Cynthia Kase has written about sharpening one's enties and exits by using short-term time frames for these, and longer-term frames for monitoring positions (Kase, Cynthia A. Trading With the Odds 1996 McGraw Hill Chapt 4). She also has some proprietary technical indicators which I can say nothing about, not having used them, and being leery of technical indicators in general.

As you point out, for me it's important that the research is done prior to trading in order to have confidence in the method, and know what to expect given its characteristics.

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Post by Sir G » Wed Apr 16, 2003 6:56 pm

Hi Dave-

You wrote:
My experience has mostly been with short-term trading methods, and I found these to be very stressful due to the need to react almost instantaneously. My makeup is such that I like to analyze in depth (my wife acusses me of "analyzing things to death" LOL!), and I couldn't do this with, say, 2 seconds or less to make a decision.

You sound very much like me, that is why this forum is such a good release for me. My wife gets tired of me analyzing everything. I'm sure she will send a Thank You note!

Try to rotate your view on the "problem" a bit. Put your analytical strengths to work by developing a mechanical system. That way there is no "2 second press" to tend with. So you end up with the best of both worlds. You reap the rewards of your natural analytical abilities, while you make the trading end of things closer to manual labor. Not no-brainer labor, sorta like intelligent labor, but still assembly line work. That also removes the emotions from that end of the process.

An added benefit of mechanical trading is that is allows us to have a reference to “knowâ€

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Post by Kiwi » Wed Apr 16, 2003 7:11 pm

Hi Dave,

In your reply to a post I see two areas where there seems to be missunderstanding (please correct me if its mine and also if you object to people attempting to answer questions that may be directed at you :? ) Hopefully I'll add value anyway.

The first relates to timeframe. I also take the approach you mention with discretionary trades (use multiple frames to improve the quality of the trades) but I think that what was suggesting is even simpler: Trade a mix of short and long term systems. Because long term systems have unpleasantly long drawdowns (30% and 8 months on a 15 commodity system is quite reasonable) it is much easier to trade a mix of systems. A long term system, a medium term system and several short term systems create a much smoother equity curve and makes trading more satisfying by giving you wins from one time frame to compensate pain in another time frame.

The second relates to mechanical systems. He seems to have suggested that your issue with short term decision making and strength in analysis could be combined by using your analytical skills to construct mechanical systems for short term trading. Then when you implement them there is no real decision making, simply a question (possibly computerised) of whether an entry or exit is triggered by the markets behaviour.

I use this approach for night trading (I trade the european indexes and the US indexes before opening before I sleep each night and sometimes take a final trade on awakening). I have developed very precise rules applying months of analysis; with continuing analysis for new opportunities. When I trade I get a buy or sell and I just action it - so the psychology is of a rule following robot concentrating on precise execution. The only issue is that it is very very boring for an analytical person.

John

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Post by Forum Mgmnt » Wed Apr 16, 2003 7:56 pm

Kiwi,

Yes, you are correct :wink: , and I don't mind at all someone clarifying my language or intentions. Even if you are wrong and I intended something else you still might come up with a new insight. That's the benefit of group discussion. I've seen some of my/our best work come from my re-interpretation of something someone else thought I said but that I did not mean to say, that triggered a conclusion that neither I nor they would have independently arrived at.

Although Dave's interpretation is a valid concept it is not the one I intended. I do tend to execute trades using short-term analysis of 5 minute bars for signals generated by daily charts.

However, I was suggesting the mixing of systems that target different timeframes. That is the most stress-free for me for the reasons you outlined, some timeframe is generally working.

- Forum Mgmnt

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Time Frames and Techniques

Post by Dave S. » Wed Apr 16, 2003 9:14 pm

Thank you all for your responses.

Regarding the time frame issue:

If we assume the market to be fractal, and that the same price tendencies persist throughout various time frames, wouldn't robust trading techniques work across mulitple time frames?
Would this be one possible approach to trading multiple time frames in order to smooth out ones equity curve?

I'd be most interested in feedback on these questions - thanks to all for your time and responses!

Dave

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Post by bloom » Thu Apr 17, 2003 9:03 am

I have quite a different take on the subject, I think more a necessity of changing timeframes rather than a psychological choice. I wrote something about it on another forum, I am going to re-post it here
Tell me what you think...


"I remember reading somewhere that the markets is analogous to
a eco-system, (I think it was andrew lo) and there is
evolution going in the markets too...

I think that traders can be catagories by the
different timeframes in which they trade,
there are position traders, scalpers, swing traders just like
there are differnt species of animals..

Now...My opinion is that the only way to profit from the markets is
through following a trend in the timeframe you are trading...
and the

POPULATION SIZE

of the the traders operating in a specific timeframe
determines the profitability of the trader trading this timeframe...as the number of traders trading a timeframe increase,competition increase and the markets become
more EFFICIENT( yes.. EMH) , profits are arbitrage away,
and the markets becomes chaotic( I didn't say it was random)

but this process provides opputunity for other timeframe traders because crowd behavior and trending action is SHIFTED to different timeframe..

as this other timeframe becomes trending( and therefore profitable), everyone jumps on the bandwagon and profits are arbitrage away again and price action becomes choppy..

this process is evolutionary in nature and its dynamics is a funtion of relative population size of traders operating in a particular timeframe

the implications for the trader is that we should AVOID trading in a timeframe in which the majority of traders operate and where the population size is largest...

the job of a good trader would simply to trade trends in a timeframe that are "out of fashion" ..

this would probably explain why some people have trouble making money in the markets

EVEN THOUGH THEY ARE DOING ALL THE RIGHT THINGS,

( CUTTING LOSSES AND LETTING PROFIT RUN)

THEY ARE JUST DOING IT AT THE WRONG TIME...

There is simply not enough profits to go around in that timeframe.

(gekko...you really shouldn't be too hard on yourself...may be it's just the market)

I look around ET and nobody even mentions holding positions overnight anymore...everyone and their mom is a daytrader or scapler nowadays...may be it's time to re-consider or buy/sell and hold again?

I thought I wrote this down to clarify my thoughts b4 I loses it , does it make sense to anyone?...hope to get some comments on the subject"

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I always had a theory about this...

Post by TradingCoach » Fri May 02, 2003 11:12 pm

I know there are exceptions but they are there to confirm a general rule.
Short term traders are trading short term for two main reasons;

1) lack of capital to trade long term
2) gambling is running in the blood too much

My folly as a trader (among other minor things) was my propensity to gamble. I even desired to be a profesional poker player I loved the gamble so much. It is running in my family my father played the horses
all his life. That took precendence before his family, his law practice EVERYTHING. and he was a lousy horse player.

P.S. many unsuccesful daytraders will say that "they of course never gamble" but if you look closely they are pathological gamblers... and I have gotten this experience from keeping my eyes open at the CBOT floor to trading upstairs at ETG.
P.P.S. Actually most gamblers gamble for the action NOT the money and hence are lousy at their choice of vice...

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In defence of short term trading :-)

Post by Kiwi » Sat May 03, 2003 1:56 am

TradingCoach,

Thats an interesting point of view but seems to me to be too limiting.

Your first point, that short term traders lack the capital to trade long term, is likely true of some or even many. Certainly it is easier to trade for a living when one doesnt have to wait thru 9 month drawdowns for the next paycheck. But c.f. trades short term as well as long term and I think that many do it to provide an overall smoother equity curve or so that they live off their short term systems while building equity with long term systems.

Your second point seems to me to confuse cause and effect with correlation. There is a correlation between STT and gambling because gamblers choose short term trading because long term trading offers them too little excitement. But the choice of STT doesnt imply or cause gambling and I wonder what proportion of STTs are gamblers - I know I'm not because my ST system is too boring!

I think that the valid reasons for short term trading are a smoother equity curve, a lower capital requirement and a higher potential return on your capital. My tests suggest that systems traded on weekly data achieve a lower return for unit risk than those traded on daily data. Similarly it seems that trading on 5 minute bars can offer still higher risk adjusted returns per market traded. This is despite the reduction in noise as you move from 5 min to daily to weekly prices.

What do others think.

Are TradingCoaches rules general or are the views above more representative :?:

Does Short term trading offer a higher risk adjusted return (on a per market basis) :?:


John

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Re: just to make one or two points....

Post by TradingCoach » Sat May 03, 2003 3:44 am

I just like to make one or two additional points;
Of course there are (were) valid reasons to trade short term. One great example the tail end of the bubble. Who in the right mind would buy a dot com stock at $300 for a $25 intraday profit and take the position home on Friday...point

There are some successful short term traders no doubt, just like there are some successful poker players in Vegas. My contention is that is FAR, FAR
harder than getting a LT system and just play golf.
Returns of all good traders (hedge funds) for the long haul are 30%+ on the average of course there will be years when c.f. will double up but even he can't pull a rabbit out of the hat year after year. (correct me if I am wrong :)

ST trading will not change that.

Of course not all ST traders visit Vegas on a regular basis but most ST traders in NY I knew were avid gamblers. Maybe good gamblers, the ones who were gambling for the money only. Of course denial always gets in the way of talking about this subject and some were even appalled that I considered trading and gambling akin to some extent...of course no offense intended...

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Post by Kiwi » Sat May 03, 2003 4:28 am

No offence taken :lol:

You may be right about the proportions. I don't know any other short term traders - most of my friends stopped trading a couple of years back :) Having looked at a lot of bulletin boards while awaiting my next boring short term trade I've seen alot of posts by people who seem disciplined and to be pursuing simple tested strategies. They don't seem like gamblers.

Are you saying that you don't believe that equity smoothing, creating a smoother income stream, and a higher rate of risk adjusted return are:

1) valid reasons?
2) achievable?

And if not, why not?

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I like the longevity

Post by TradingCoach » Sat May 03, 2003 5:28 am

I coach traders. Some of them are young ones who read all the daytrading books and for them I think a trend following method is better.
They are the least likely to listen but they also have time to experiment should they blow the 50k on daytrading aunt mary left them there is time for change....

I do buy the equity smoothing argument - I can't argue with statistics.
Also in trendless markets ST trading has merit even if one swing trades instead of pure daytrading.

Having time tested methods appeal to me and I even accept the drawdowns as price you pay. I do agree that each should find a method that suits the personality. I have tried ST trading and I have failed. Since I have switched I am much happier and my result are better (not spectacular)
Also I am working form home and my 2-year old daughter would never let me daytrade.....:)

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Re: combining timeframes

Post by stopsareforwimps » Sun May 06, 2012 7:23 pm

Dave S. wrote:Interestingly, Cynthia Kase has written about sharpening one's enties and exits by using short-term time frames for these, and longer-term frames for monitoring positions (Kase, Cynthia A. Trading With the Odds 1996 McGraw Hill Chapt 4). She also has some proprietary technical indicators which I can say nothing about, not having used them, and being leery of technical indicators in general.
Has anyone else read this book? It looks interesting but had very polarized reviews on Amazon; in particular people felt it lacked detail and was just a teaser for her products.

Kase, Cynthia A. Trading With the Odds

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Re: combining timeframes

Post by Chuck B » Mon May 07, 2012 9:52 am

stopsareforwimps wrote:
Dave S. wrote:Interestingly, Cynthia Kase has written about sharpening one's enties and exits by using short-term time frames for these, and longer-term frames for monitoring positions (Kase, Cynthia A. Trading With the Odds 1996 McGraw Hill Chapt 4). She also has some proprietary technical indicators which I can say nothing about, not having used them, and being leery of technical indicators in general.
Has anyone else read this book? It looks interesting but had very polarized reviews on Amazon; in particular people felt it lacked detail and was just a teaser for her products.

Kase, Cynthia A. Trading With the Odds
Your summation is likely correct. I recall reading this book back when it came out, explored some topics, and found nothing significantly useful when evaluated. Most all books like these ARE teasers for products/seminars of the author. Secondly, most all of them use best case selected examples, or at least enough "good" examples, to convince the reader of their merit. Fortunately, with proper testing and evaluation, it's easy to to discern true merit.

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Post by Moto moto » Mon May 07, 2012 10:12 am

Never read it, but have seen it mentioned on other various day trading sites.
Again polarized opinions to little real interest or discussion.
If the biggest criticism is that she does not reveal all, or that her methods cannot be properly backtested --- then what is new..... :)
however - what system can and will work in the future.

My guess is that it will hit the same issues as every trading book of its type, and yet its not touted as a must read by the general populace (good/bad ?)....Depends I guess if you are looking for general ideas rather than specific ones.

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Post by stopsareforwimps » Mon May 07, 2012 7:56 pm

Moto moto wrote:Never read it, but have seen it mentioned on other various day trading sites.
Again polarized opinions to little real interest or discussion.
If the biggest criticism is that she does not reveal all, or that her methods cannot be properly backtested --- then what is new..... :)
however - what system can and will work in the future.

My guess is that it will hit the same issues as every trading book of its type, and yet its not touted as a must read by the general populace (good/bad ?)....Depends I guess if you are looking for general ideas rather than specific ones.
Thanks Moto Moto. I do like ideas more than formulas so I might buy it.

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