Short Term Trading and Day Trading Is No Panacea

Consider an excerpt from Trend Following:

When you trade more or with higher frequency, the profit that you can earn per trade decreases, whereas your transaction costs stay the same. This is not a winning strategy. Yet, traders still believe that short-term trading is less risky. Short-term trading, by definition, is not less risky, as evidenced by the catastrophic blowout of Victor Niederhoffer and Long Term Capital Management (LTCM). Do some short-term traders excel? Yes. However, think about the likes of whom you might be competing with when you are trading short term. Professional short-term traders, such as Jim Simons, have hundreds of staffers working as a team 24/7. They are playing for keeps, looking to eat your lunch in the zero-sum world. You don’t stand a chance.

Unfortunately, the flaws in day trading are often invisible to those who must know better. Sumner Redstone, CEO of Viacom, was interviewed recently and talked of constantly watching Viacom’s stock price, hour after hour, day after day. Although Redstone is a brilliant entrepreneur and has built one of the great media companies of our time, his obsession with following his company’s share price is not a good example to follow. Redstone might feel his company is undervalued, but staring at the screen will not boost his share price.

The logic is clear. However, emails still arrive:

Listener: Good morning. I am fairly knowledgeable about Trend Following as a result of reading some of your books. My current plan is to successfully and consistently day trade the e-Mini S&P, then take those profits and learn Trend Following via your course and then successfully trade that way as well. So for the past almost 6 months I have been studying, following and recording daily price action and trading the S&P futures with varying degrees of success and failure. I believe that I am poised for a major breakthrough in my trading plan. As a result of hundreds of hours of studying and recording I have noticed some correlations of overnight price activity with daily price activity, price movement that is inter-related and occurs on a regular basis. To me, these are identifiable events (patterns) on the charts that reveal the “invisible hands” that influence and drive market activity, and perhaps tip off their thinking of where they are going to move the market to. I am now able to use this information on a small scale to take profits out of the market, and continue to make excellent progress. However, I still can’t pinpoint exactly how to use this information on a larger scale to make profitable trading decisions . I have an idea of how to conduct a study to determine if indeed this realization can or cannot be used to make consistently profitable trading decisions, but am not very sure if it would be correct or the best way to conduct a study. I would like to enlist the services of an individual who is well-versed in these types of studies using statistics, probabilities, time and percentages to determine possible outcomes. For example, if I see that a certain overnight price action occurred and it was inter-related with yesterday’s activity and/or recent overnight prices in a certain way, then what are the percentages/probability that today’s activity will be X. As I said earlier, I have recorded these relationships for just shy of 6 months now and suspect there is a way to use this information to make profitable trading decisions, but I’m not quite sure. So, my question for you is can you recommend anybody who you know that has the skill set to do this type of study, and may consider helping me make this determination? Of course I understand that there would be fair compensation for this service. I have already reached out to [name] but have not received a response, so I thought this may be a better way to go. I’ve also been to the Mathematics department at Ohio State University searching for help there, but to no avail. Please let me know what your thoughts are, and thank you very much for your time and for reading this.

Covel: Just to clarify you are asking only about short term S&P trading? To be direct: I have zero leads to help you on that front. I counsel all to avoid day trading. Feel free to follow up.

Listener: Understood. Yes, I am in an S&P trade for 2-3 minutes on average, 12-15 trades per day on average. This is due to the minimal margin requirements, only $500 per contract. It is definitely a very difficult type of trading, but I am using it to be able to afford to Trend Trade. I have been blessed to be shown a system that works which I discovered through much charting and effort. I call it RcS MP for “Reversal continuation System using Magnet Prices”. There is price action that occurs regularly that is “hidden in plain sight”. For instance, look at the 1 minute chart on the left in my attachment. From 1111 to 1122 the price action is a high possibility indication that prices will go down. I drew the grey lines (ON50%- 73, etc.) on the chart at about 730AM, and 4 hours later it is telling me that there’s a good chance of prices going down. They hit the ONT2a- 70 exactly, then went down to within .75 pt to the ONT3- 66.75. Short 2 contracts from 72 to 70, short 2 contracts from 72 to 68 equals 12 pts total, $600. It happens over and over again all week long. I’m looking for help to verify whether or not certain correlations can give me a high probability of larger profits in a longer time frame. Anyway, please do not share this with anybody. I appreciate your time, thank you again.

Covel: From a past thread: Ed Seykota on short-term trading.