Last night I listened to your podcast episode 458 on continuous improvement. In the speech you mentioned if one is using trend following in day trading, go away! I was shocked to hear that. For the past two months, I am using the 15 min and 30 min charts on most of my commodities and futures trading. The reason is if I use the daily chart to trade, the N value (ATR) is too big and my capital is very limited, plus the difference in currency exchange between USD and MYR.
Moreover, in the same podcast you mentioned it is gambling staring at the computer screen whole day–which is what I might result in doing if I use the 15 min or 30 min chart. And trend followers don’t do that?
Not a new message from me about day trading. I say across my books. I say here.
You can’t effectively trade a 6 month move as a day trader, for example. You can find more here:
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.
The excitement and anxiety generally serve to medicate deeper issues.
Pithy? Yes. Depth behind it? Yes. Follow below.
“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.”
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?”
“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.
Hi Michael, I see a few weeks ago you were after a new laptop 13 inch Air. Just trying to work out do you use that laptop on your travels to trade personally? Or have you got staff trading for you? You see the reason I ask is I know you are a trend trader and wondered if you trade on the go? And what time-frame do you use? Because I have been using daily time-frame, but now looking at 5 min time-frame because I believe even with small time frames like the 5 minute chart there are still trends, but just a lot smaller. But I know I will be paying more spreads, but there is a lot more action. Just wanted to know your thoughts. Thanks Michael.
All the best,
I have absolutely no feedback on day trading, 5 min bars etc. Not my world. And to paraphrase Ed Seykota, if you want to trade the really fast stuff, why not go for the speed of light?
For a long time I am debating with myself how to approach the “Close” problem. I can summarize it very simply: When using any of the Open-High-Low-Close prices, in our testing, and algorithms, we are using a thing that do not exist in real life. In real life, these numbers are known of course, only in the next bar or only in the last tick of the current bar. So, if the logic depends on doing something, intra-bar, by the status of these numbers, it is only in the last tick, (and therefore with the possibilities of suffering a very extended bar) or to enter and exit intra-bar, in case these numbers changes as to change the decision to enter or exit. The two alternatives will create a very harmful effect on the system performance. I am aware of the possibility to create a buffer around the line of decision, and so, not to enter-exit back and forth, too much, but then the question will be how wide this buffer should be, relative to the time-frame (and volatility). Any ideas or suggestion? From listening avidly to your audios, I think that you deal with a more “long-term” approach (weekly bars) but I think that this “problem” is relevant in all time frames and even in all price representations. Many thanks in advance.
Nothing I prescribe is intra or day trading. Simplest way I can offer feedback. This is not a trend following concern.
Hi Mr Covel, I am Michael Yang, a Chinese trader, also a reader of your book. May I ask you a question? I have already found a way to identify the trend, and I agree with your method. I always trade by following the trend. These days, I think of different time frame and find two general ways to trade. The first one: I try to identify a long-term trend in a big time-frame, just like day chart or 4-hours chart. Then I try to find any following-trend signal in a smaller time-frame. For example, if I find a down trend in a 4-hours chart, I will ignore all buy signal in any time-frame that shorter than 4-hours. I will follow all sell signal in 1H chart, 15M chart, even 5M chart. By this way, I think I can follow all big trend that identified in 4-hour chart. But, I will miss some big reversal trend. Because any trend change begin from small time-frame, and then big time-frame. The second one: I try to trade in any single time-frame. I will follow all signal in a single time-frame, buy, sell, and buy, sell, and then buy,sell. By this way, I can hold some position that against big trend in big time-frame and make a big stop loss, but I cannot miss some reversal trend. I follow all trend in a single time-frame. What is your opinion on these two ways? Which one do you think is better for traders? Thank you!
I have never met a successful trend following trader trading 1H, 15M or 5M time periods. That’s not trend following. That’s gambling. Feel free to follow-up with any questions.
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