In this post I want to answer
a good question from Zac Lim, regarding short term trading and long term trend
following. I will share with you my experience in developing and trading these
two completely different strategies. Before I discuss about the difference
between short term trading (STT) and long term trend following (LTTF), let me define each trading strategy in short. In my definition, I refer short term trading
(STT) as trading decision made based on intraday data such as minutes chart, whereas long term trend trading (LTTF) uses end of day (EOD) or weekly data to
generate trading signal. Below are the summaries…
Win Rate
I emphasize a high win rate
when designing STT because short term market movements are more “random” as
compare to LTTF. STT need to capture profit in a relatively “random” market
movement. Once profit is there, I will lock it before it disappears. Therefore,
most trades end in profits. LTTF is different.
It wins 3-4 out of 10 trades made, however winner’s magnitude is far
greater than loser one, making it still profitable to trade.
Trading Philosophy
As the name suggests, LTTF’s
idea is quite simple that is following trend. It follows market only after
prices start to show trending characteristic. STT on the other hand employs both
trend following and counter trend ideas in its practice. Sometimes it tries to "predict" when the trend will end, thus initiate position in the opposite trend
direction.
Money Management
I use completely different
kind of money management systems to trade STT and LTTF due to their significant
parity in Win Rate just described above. Besides that, profit per trade from
LTTF is significant higher than of STT.
Cost
STT generates around 150
trading signals a year compare to LTTF 20-30 trades (including contract roll
over). STT trade more frequently compare to LTTF, thereby paying a lot more in
commissions and slippages.
Mindset
I have to establish different
mindsets for each trading strategy. When I trade STT, my energy level is higher
and I am more reflexive. I need to change my market perspective fast because
system may generate completely opposite signals in the short period of time. In
some instance, I will need to stay in front of screen to “wait” for system to
issue trend change signal. In LTTF, I am more relaxed, and often forgot that I
still hold long term position in LTTF. Since I use EOD data for LTTF, I spend
less than 5 minutes a day to complete my “job” trading LTTF.
Data
I use end of day (EOD) data
when designing LTTF. While STT uses both EOD and minutes data to generate
trading signals. One can obtain EOD free of charge from exchange website or
from brokers. Minutes, intraday, or tick data can be quite expensive and hard
to find, unless you are diligently enough to collect it every day.
Drawdown
Drawdown in STT tends to be
shallow and short as compare to LTTF. To trade LTTF, one needs to have the
patience. I once experienced drawdown period of more than 1 year before account
broke new equity high. Besides that, the quantum of drawdown in LTTF is huge. A
50% drawdown is considered normal in many LTTF programs.
Diversification
STT need active management somewhere
close to intraday level. It is very stressful and difficult to diversify among
many markets. When certain markets open nearly 24 hours a day, I would say it
is impossible to do it alone. Trading LTTF can be done in 5 minutes a day, usually
after market hours, making it a good candidate for one to diversify among many
futures markets.
Conclusion
STT and LTTF clashed occasionally,
meaning I hold both long and short positions in the same market. It happens probably
when a particular market is doing sideways movements. Personally, I prefer LTTF
over STT due to my slow and steady personality. I still trade both in order to
capture different market niches in both long and short term timeframe.
Thank you Bryan. Another concern that I have here. STT generates a higher win ratio and lower drawdown so, when it comes to money management, we are able to trade more lots compared to LTTF. This is also a question and I hope you can enlighten me with this.
ReplyDeleteSTT generates a NET return of 900 points in CPO for the year( an example only ). LTTF generates a net return of 1000 points in CPO for the year. In actual fact,i think STT performs better due to the fact that we are able to trade more lots and the compounding effect is far greater than LTTF. Honestly speaking,although I am not your client, but your blog has inspired me to look beyond positional trading and explore to new possibilities.
Once again, thanks a lot.
Zac, in this matter, my view is that STT and LTTF also have its own advantage. Trading is not a science or maths subject, it must also take consider human being behavior. Long term investment is suit for Warren Buffett, but not suit for Martin Schwartz（Wall Street's Champion Day Trader）. We can't just simply follow LTTF just because that from maths calculation LTTF is better trading method. I think Martin Schwartz had try LTTF before, but he fail.
DeleteBe yourself. Just trade in your own way. I believe you are able to create wealth thru you own method.
From Yong
Zack,
ReplyDeleteBacktest results do not reflect real trading conditions. Slippages can have big impact in trading results. I give you an example here. Average profit per trade for STT is 20 ticks. Slippage per trade is 5 ticks (entry and exit). Average stops = 10 ticks. In this oversimplifying example, slippage consist of 50% of stops. In volatile market, when slippage > 10 ticks, one may easily double the intended risk in one particular trade. In my opinion, it seems a good idea by trading more lots in STT, it may backfire in real trading environment. I suggest you try to trade with real $$ to experience the process. Whereas in LTTF, the impact of slippages is relatively small compare to overall profit.
Thank you for your valuable comments. It also inspire me to explore more in trading.