Trend Following ‘Day Trading’ Question

Feedback in today:

“Hello, I am seriously considering purchasing your flagship trading systems course, but I have one very important (to me) question before I do. I gave up work 12 months ago and have spent 8-10 hours per day, mostly 7 days a week, studying trading. I confirmed for myself that trend following was the most profitable, and I also confirmed for myself that all indicators are useless for anything better than 50% accuracy. I have categorically proven to myself that prediction is futile and reacting and following the market is the only real option. So everything you say and seem to teach resonates well with me. I have read your trend following book which I think is the best book I have read on trading specifically. However, I have to disagree with one very important point you voice quite strongly, and before I buy your course I would like you to explain to me the following quote from your website FAQ page: “Day trading is fool’s gold. Our training will be worth millions to you over the course of a lifetime if you simply understand that day trading is a waste of time.” What I don’t understand is that from a technical aspect (if we ignore all fundamentals as you suggest) is that all charts are identical. If I showed you a one minute chart, a 1 hour chart or a 1 week chart, without any prices (simply the individual bars or candle patterns) you would not be able to tell the difference of time scale. A 1 hour chart will have just as many noticeable and strong trends as would a daily chart. If I am trading with a % risk per trade, the pip values are proportional. If I risk 1% on a trade with a 10 pip stop loss and ride a trend for 100 pips profit on a 1 minute chart, the impact on my account equity will be identical as if I risked 1% on a trade with a 100 pip stop loss and ride the trend for 1000 pips profit on a daily chart. The real difference is I will be able to trade far more often on smaller time frames than if waiting for trends on daily or weekly charts. Obviously I understand if someone is trading $ Billions then they simply can’t trade small time frames because of liquidity issues and getting orders filled. But for people starting out with less than $100,000, it makes no sense to sit there waiting for one trade per month, risking only 1% of my account, when I could be trading daily, using the exact same entry and exit rules. Surely technical analysis by its very nature is completely independent of time? You even state yourself in your book that the instrument is irrelevant because the charts and trends are the same for all markets……we just follow the trend regardless of fundamentals or the instrument. So how does time scale make any difference? I will be able to build my account much faster with exactly the same strategy and risk management if I trade intra-day while my capital is small, and then move up and scale in to trades as and when my trade size increases to where liquidity matters for order filling. I hope this question does not come across as argumentative in any way. I just genuinely don’t understand the logic, and I always need to understand something fully before I just follow blindly or take someone else’s word as fact. If you could help me understand why your way of thinking is correct, and where my logic fails, I would be very grateful and will be ready to purchase your trading course this week. My sincere thanks for you taking the time to read this email and hopefully answer.”
Kind regards,

Great question! Short answer: transaction costs and slippage are killers. Longer Answer? I am reposting an earlier question and answer session on the same topic:

“Hi Michael, I have been reading and following your website and blog posts for the past several months. I have to say that the information you provide is rare to come across in today’s internet world. The work you’ve done over the past several years has been amazing. I just wanted to introduce myself and ask you a question on which you may be able to shine some light on. Firstly, my name is [blank]. I am currently a student at the University of Toronto in Ontario, Canada. I am in my final year of, what they say, is a prestigious finance program in one of the top universities in the Country (although the quality of information i receive daily is, in my opinion, average at best). I will be graduating in a about 2 months and am one of the few lucky students, in this economy, to have been offered a full-time position post-graduation. In May, i will be starting a job as a junior trader in a prop-trading firm located in [blank]. The firm specializes in futures trading. Although i have been interested in trading and trade on a part-time basis for the past year or so, i am fairly new to the game. The firm is mainly a day-trading firm as many prop-trading firms are. I was wondering how your concept of “Trend-Following” applies to the day trading time frame (that is minutes, hours, etc)? Does this type of strategy only work for longer time frames or has it been successful with traders who use it to day trade? Thank you once again for everything you do. Hope to hear from you soon, [blank]”

It is tough. Many issues from transaction costs to a need for superior access and execution are working against you. Ed Seykota once gave some insights on short-term trend trading:

“Intraday trading is tough since the moves are not as big as for long-term trading and there is no comparable reduction in transaction cost. In general, short-term trading systems succumb to transaction costs and execution friction. You might simulate your system over historical data and notice how sensitive it is to assumptions about where you get your fills…The shorter the term, the smaller the move. So profit potential decreases with trading frequency. Meanwhile, transaction costs stay the same. To compensate for profit roll-off, short-term traders have to be very good guessers. To improve guessing skills, you can practice dealing cards from a standard deck, one at a time. When you become very good at it you might be able to make money with short term trading.”

Seykota was also asked:

“I am new to trend following and wish to ask you what your favorite chart is for determining a given market’s trend? Daily, weekly, yearly, hourly?”

Seykota responded:

“Hmmm…your list seems to lack scaling options for minute, second, and millisecond. If you want to go for the really high-frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light ‘by eye.’ I don’t know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor — something like a daily price chart, going back a year or two.”

I agree with Seykota’s wisdom, but he is not saying short-term is impossible. There are shorter-term systematic traders who have done quite well (Toby Crabel and Jim Simons, for example). They would agree with Seykota that their style is hard. The shorter you go, the more the need for great execution, fantastic data, and multiple systems. And in closing from Jessie Livermore:

“…the big money [is] not in the individual fluctuations but in the main movements — that is, not in reading the tape, but in sizing up the entire market and its trend.”

Big trends? Don’t we all just know those are right around the corner at all times. No prediction of what or when, but they are always coming.

You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content. Out April 24th 2017.

29 thoughts on “Trend Following ‘Day Trading’ Question

  1. hey [blank], check out timothy syke’s website if you’re interested in say trading.

    timothy sykes is to day trading as michael covel is to trend following.

    what i like about these two is, they actually teach you to do it yourselves.

  2. Michael, you might introduce him to Brett Steenbarger’s series of posts about prop-trading firms. Plenty of scams out there. Either this guy’s got a job at a junior-trader in an investment bank, or I don’t think there is really something like being “offered” a job at a typical prop trading firm, with a real salary.

  3. I am a “day” trader, 2010 is my twentieth year. You are lucky in that there has been a lot of change especially in the last 15 years. Computerized trading, the move to for-profit exchanges, global competition are some of the tsunamis that I have had to work through.

    I would say systematize as much as possible. Subjectivity is the deadly trap that short term traders must avoid daily. What you will find is that executing is easy. Money management and your psychology are the two things you will have to work on as long as you trade with controlling your inner-demons being the most important over time.

    Also, if you can make money short term trading try and move to being a trend follower over time. Trend following is a lot easier on your psyche.

    Good luck.

  4. Bill you’re right about systems. Systems are key. The best part about a system is that it enables you to see exactly where are you screwing up. After that its easy, eliminate the bad stuff, keep the good stuff, and you’re good to go.

  5. Like Jesse, I too believe that it is important to know the trend of the overall market. I guess that is why I have been calculating the trend for over 40 years. I have not been able to go to one of those islands where there are no phones or TV’s. I am 78 and still do it every day. Some people like what I do, but most people do not believe that it is possible to identify changes in the trend of the stock market. I am a Market Timer and most people would not admit that. Most people do not believe that the market can be timed, so they don’t work on that problem. I speak at major Money Shows and I thought if I told the attendees that I am willing to share my work with them that they would rush to tap into that knowledge. They do not. So I guess we have to live with the fact that most investors are Sheep. I am pleased the Michael listens and has included me on his list of Influences and allowed me to participate in his film.

  6. I just love this article.
    It made me face the truth that my continued attempts at short term trading were a waste of time and money.

  7. Day traders usually end up loosing everything they got, primary their most important asset.. health. But if they think they can make it in that kind of rat race so be it… you really must be an adrenalin junkie that to my own thinking is similar to that of a obsessive gambler.

  8. Your best bet is to develop a database for short term trends in baseball and basketball. Very profitable. But you must relocate to Las Vegas unless you are not worried about potential legal problems.

  9. Lets face it. Your abilitiy as a trader is your ability to time the market. There are some great traders out there who can really time the market in the short term but they are few. Most likely you wont get into detail that they got into in their trading and your going to have to just up your time-frame. And to the really average guy who doesnt know anything, dont put your money in index tracking based funds. Get into the absoulte funds and dont care if you make money this year or not. Give it 5 years

  10. Michael

    I was reading Abraham’s website and prospectus – he mentioned that he uses also short term trend trading – so how would someone like Abraham would define short term trend trading vs normal trend trading?

    And If I assume that short term trend trading means that he will pick up trends that last few days or weeks…. would not this be against letting your profits run?


  11. Would i be classified as a trend follower? I trade off daily charts,only look at the market at the end of the day only trading in the direction of the trend.My winning positions last between 2 weeks to a month.

  12. Michael,

    I am a systematic trend follower working off the daily charts, using approximately 30 years of data for backtesting.

    I am soon going to start investigating some of the shorter time frames in the “strong trending” 24-hour markets such as currencies. Positions would be held overnight until the end of the trend, so this is not strictly day trading.

    While I understand that transaction costs and slippage kill systematic trading on the shorter time periods, I would think that I should be able to get positive results on either 1 hour, 2 hour or 4 hour charts for currencies.

    Anyone have any experience on this middle ground that exists between the day trader and the daily / weekly chart trend follower?


  13. Trading Forex using four-hour charts and holding positions using a trend following approach does work well.

    However, even with your computer making the trades for you while you sleep there are problems.

    1) Loss of internet connection.
    2) Loss of trading platform connection to trade execution network.
    3) Computer malfunction.

    There are other potential problems, but these are the main ones that I have experienced.

    Trend following using daily charts eliminates these problems — and is more profitable anyway.

  14. Gavin,
    I also have been trading currencies as of late. I like the 4hr and 1hr charts. Along with watching dailies. The 4hr can get you into some nice, lasting trends. EUR behaves very well. As does AUD. Trans costs are minimal. I have thought for awhile, that given the better flow of information nowadays, the 4hr now is quite similar to the daily of say 10-15yrs ago. You’re still not tied to the computer and, only need to check prices a few times a day. Also watch some MAVGs on 4hr. Cheers!

  15. I think what the experts and Mr Seykota trying to tell us is…” Trend following is just simply follow the price to it’s yearly highest and yearly lowest point with a predetermined trailing stop, without the need to predict or forecast the price direction, top or bottom” .Just exit [and reenter] when price cross the “long/short threshold” and the trailing stop.

  16. So far I haven’t seen a post here that provides a knockout punch against intraday trading, nor have I seen a counter-argument to the observation that prices have a fractal nature (you can’t look at a chart and tell what the timeframe is). Position size is often larger (as % of the account size) on intraday trades as compared to traditional trend trading, which may overcome the issue of transaction cost.

  17. James asks “where my logic fails”. The problem is a common one that beginners often miss: “You can’t scale pips”. The reason that beginners get confused is because most charting packages do exactly that. They spread the chart so that it looks nice and fills the window from top to bottom and stretches the vertical axis as needed. I’m looking at a USD/EUR 1-minute chart right now. There is what looks like a great trend move. But if you look at the y-axis the move, from peak to trough, is 7 pips. If you lose only 2 pips waiting for the trend to be established and miss 2 pips at the end of the trend (an almost unbelievably tight system) you have missed 4 pips. Add the spread, which at the moment is a fairly typical 4 pips, for a total of 8, and you called trend perfectly and still lost 1 pip. On the other hand, if you are not perfect, the 8 point cost of trading is dangerously close (only 2 pips away) to the 10 pip stop proposed by James. One little wiggle trips the stop. Finally, none of this addresses the fact that I don’t remember ever seeing a continuous 100 pip trend on a 1 minute chart.

  18. I know I should let this go, but numbers are my life. Assuming that everything that James claims about scalability is true. Then twenty 10-pip trades on a 1-minute chart are as likely as one 200-pip trade on a daily chart. A pip is a pip, so the total profit would be the same. The only difference is the number of trades. This leads me to the conclusion that James’ goal is not to make money but to get excitement from getting in and out of positions.

    There are professional traders in Chicago who are adrenaline junkies. They are successful at trading because they recognize this shortcoming in themselves. When they need a rush, they jump on the L to the airport and buy a ticket to Las Vegas. They return to work the next day wearing the same shirt and out a couple of thousand dollars, but they have satisfied their need for action without messing up their trading account.

  19. @Chuck and James:
    You obviously have NEVER traded yourself. Scaling-laws are nice to speak about but typical for economist from universities and desks. So I encourage you to trade… be in the market… it’s not paper-trading anymore… put your money where your mouth is. Make your experiences. And you’ll end up where you want to be or what you wanna get out of the markets.

  20. @Rob:
    This is a wonderful forum and I thank Michael for providing it; some interesting discussions have appeared here.

    However, in order for discussions to make sense, a poster must read the prior posts. You appear to be disagreeing with both me and James. Since both of my prior posts in this thread attempt to refute James’ position, disagreeing with both of us makes no sense at all. (PS I have been trading for three decades. So much for your “obviously” comment.)

  21. @Chuck:
    While you are coming up with a ‘explanation’ why James is mistaken you confuse with pips and 1-minute charts. Furthermore you state: “Finally, none of this addresses the fact that I don’t remember ever seeing a continuous 100 pip trend on a 1 minute chart.” Just go figure… this moves are THERE (!), the erratic behavior nowadays does exactly this… even after 30 years of trading experience. Just re-read the link I posted in nr. 22.

  22. Michael says:”The goal of the Trend Follower is to take what is given….”
    I think this quote worth to read a million time…like a mantra to really understand the essence of trend following!

  23. Day trading is possible but you need to be many times better in your mental, discipline & money management as well as Patience as compared to a trend trader on a longer timeframe.

    Many trend traders have tried daytrading and failed. I know too well. This is the truth because the demand on the mental aspects are simply too overwhelming for many of them.

    Does that mean day trading is a sure lose bet? Definitely not! Cos I am a living testament.

    But I agree there is the disadvantage of a higher transaction cost and slippage for very short timeframe traders like the 1-5 min chart traders.

    To be fair, I am a 1 hour chart trader and i recognised the minimum profitable timeframe to trade is not any less than 30 min charts.

    Just to defend the daytraders with my fair comments here.

  24. Ed Seykota’s responses to questions about day trading are characterised by two things which I do not like. Firstly he is unnecessarily rude and dismissive. Secondly, his answers are rhetorical in style and not detailed and objective. I usually find that if a person needs to advert to rhetoric and insult in a technical debate, that person is insecure about the position they are defending.
    Frankly I don’t think that James’ question above about short term trading has been adequately answered. I am very interested in exactly the issue he raises because I am just starting out on the road of educating myself to be a short term/day trader. It strikes me as a very interesting way to make a living.

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