Saturday, January 24, 2015

Shorter-term vs longer-term trading

One question I was asked the other day related to the merits of trading a longer-term method compared to one with shorter-term entry/exit parameters.

My basic answer to this question revolved around how you view risk and rewards, your beliefs and personality, and trading opportunity.

We started off looking at this by comparing some stocks where, using a longer-term method, you could have held a position for a year, maybe even 18 months, and generated some very nice profits as a result of the big trends which developed.

However, by the longer-term nature of the trade, and the parameters used, the position size would have been smaller, due to the wider initial stop. Therefore, the stock itself could have moved more than 100%, but the profit calculated in terms of R may only be +10R.

Using my own method, which is at the shorter-term end of the trend following scale, In the past I've made a +10R profit on a trade in a matter of weeks. I recently had a profitable trade closed for a +5R profit, in just over 5 weeks. In that period, the stock price moved up only 28%.

No one can say either approach is wrong. All I would say is that, by using shorter-term parameters, you may get a higher level of trading opportunity (more signals which meet your criteria) over the course of the year, BUT there is also the potential to be whipsawed around more.

The other point to note is that, while longer-term methods may filter out some of this whipsawing, you will be getting much later into new trends which do develop.

In extreme cases, someone trading a shorter-term method may have have pocketed a nice profit, and will get an exit signal just after those trading longer-term will have just entered, who may subsequently be stuck in a loss-making or non-performing position.

As a historical example, I started getting a lot of long signals in late March/early April 2009, after the markets ultimately bottomed out from its 2008 downtrend. By acting on those signals, I was able to make decent amount by getting into those new uptrends. However, someone trading using longer-term parameters (such as 52 week highs or lows) may still have been short on positions at that time, and will have missed out on that opportunity.

The other side of the coin is that longer-term traders will have been able to ride the 2008 downtrend for longer, whereas someone trading shorter-term may have been trading on the short side, but might have been stopped out occasionally on the snapback rallies that occurred in that period. But in terms of overall performance expressed in R, there may not have been much (if any) difference.

It is also my opinion that, to trade a longer-term system, you need even more patience and discipline to make the big profits. Could you keep a trade open for 18 months and avoid the temptation to bank profits for fear of them disappearing?

By the nature of a longer-term method and the parameters used, you will also have to deal with an even bigger giving back of profits as trends finally finish and price reverses.

Would you have the mindset to stick to those entry and exit rules?

I know I don't have the necessary patience to do that. So, I stick to what suits my personality and use parameters which other traders may feel are too short-term for them.

Finally, the other point people need to consider is how much time every day or week you are able to consistently commit to trading your desired method - this factor alone may determine your preferred timeframe and parameters.

Remember there is no one right way to trade that will suit everyone, but there is a right way for you.


  1. Good post.

    From my trading, trading on the lower timeframe will result in higher R but lower winning % due to the whipsaw.

    But the increase in R more than justifies the low winning %.


  2. P.s.

    I feel the end result is similar but the main difference between long v. short-term is the long term approach takes profits in lump sums for less work and risk. From a long term perspective risk increases with increased frequency of trading.