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Day Trading is Not Trend Following

A recent email:

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.

Sports Betting: Billy Walters the Trend Follower

Insights on Billy Walters:

As a society we have been conditioned to believe that there is a difference between gambling and investing. Of course, this partially true, however, the degree to which we “invest” and “gamble” is smaller than most are likely comfortable admitting. The majority of us have been conditioned to believe that buying a share of Bank of America is vastly different from placing a bet at a roulette table. A closer inspection of “investing” and “gambling” shows that the two are closer than the Wall Street sales machine would like you to believe.

60 Minutes aired an excellent piece this past Sunday about Billy Walters (video attached below). Walters is a Las Vegas gambler widely acknowledged as one of the greatest gamblers Vegas has ever seen. He’s so good that he has to bet anonymously through partners due to the fact that most casinos won’t take the other side of a bet from Walters. The few casinos that do bet with Walters do so mainly because they want to know what he’s thinking. But Walters isn’t truly a gambler. Walters is so good that he feels safer gambling than investing. And ironically, it isn’t the casinos in Vegas that have taken Walters for a ride over the years, but Wall Street. Walters claims that it is not Vegas where the thieves live, but rather the men in suits on Wall Street.

Before we can understand the difference between gambling and investing it’s best to define each. Gambling is placing capital at risk of loss with an uncertain outcome in a system in which the odds are generally unfavorable. Gambling has an inherently negative connotation because it is generally a term used to describe games in which the player is a guaranteed loser over the course of the game’s lifetime. Unlike investing in equities, a bet at a casino generally has unfavorable odds. The game is intentionally devised as such. Investing, on the other hand, is placing capital at risk of loss with an uncertain outcome in a system in which the odds are generally favorable. The primary difference between gambling and investing is the determinability of the outcome. The lottery for instance, is entirely unpredictable. Purchasing government bonds has a high level of predictability. Read the rest of the article.

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