Short Term Trading (STT) vs Long Term Trend Following (LTTF)

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. 

Position Update 20130520 + Account Statement

Received an email asking whether system trades real money or just "demo account". To prove that real money is involved, I will show part of the trading account statement in this posting.

<img src="statement.jpg" width="846" height="185"></body>
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FKLI
Nil

FCPO
L2342 (20/05), Open position

Interesting Comment in Previous Post

I received an interesting comment and thought readers might like to read. 
From Eken,

Do you trade full time? I read your blog and found that trading profitably sounds easy and simple, at least for you. However for me, my futures trading journey is a total disaster. 

I started trading in year 2010 with RM50K. I always thought broker knew something more, therefore relied heavily on their tips and recommendations to trade. In less than 6 months, I lost more than 70% of my capital. I surrendered and quit trading for the first time.

After rested for 3 months, I open another futures account with another broker, this time a broker that I have known from attended a seminar. He is a good and diligent person. I learn something new from him. I banked in another 100K. After only 2 months, I gain profits of 20%. I thought I am the king of futures. He told me to keep my ego and maintain good discipline. Then I read a newspaper advertisement about futures trading system. It claimed to make more than 100% in a year. I immediately signed up their signal services. Puuuui! I lost almost every cent trading their signal. I remember called them after broker called me to top up after moeny is not enough to maintain even 1 lot. They told me bank in some more $$ to hold the position. I was so naived to believe in them that I banked in another 50K. Sad to say, I busted my account with in the next 3 months. 

I felt utterly disappointed with myself, losing self confidence ... This affected my jobs. I was fired and forced to move back to my kampung in Segamat. Through my friend recommendation, I found another job in Singapore. Now live in Johor Bahru, travelling each day through Woodlands checkpoints eacy day to work. 

Even though I lost almost entire saving in trading. I still believe theremust be a way to beat the market and "trading for a living". I attended many trading seminar on futures, forex, stock trading etc, always trying a way to make a comeback. Until recently I started to read your blog, I found something I really like, the way you trade. 

Sorry, I wrote too much here. Do you mind me email you to ask for guidance in trading? Do you accept students?

My reply:

Hi Eken,

Thank you for your comment. Trading profitably is definitely not as easy and simple as you mentioned. However there are ways to tackle the market so that hopefully it can work in our favor.

I met many traders and when they relayed their trading experiences, I found many similarities. The one very grave “mistakes” I saw, almost in every story I heard is, blame game. Probably this is the fatal mistake that if you are not ready to rectify and correct, there is no way to you can enjoy the game. When we win, we claimed how smart we are. But when we lost, we blame brokers, system, market, manipulators, other traders, etc… We tend forgot we are the one who pulls the trigger; no one forced us to trade. Yet, when we shifted the blame to others, we feel relieved.

Anyway, in your case, I can sense the fighting spirit. If you continue to learn and improve, there is no way you can’t be profitable.

For your info, I am just an ordinary, private trader. I am not an educator or signal provider. And I am not taking any students due to bad experience in the past. I created this short term system to try to capture short term movement in the market.  I still trade other long term trend following systems in FKLI, FCPO and some foreign markets. This is definitely not Holy Grail.

If you want, you can ask anything in the comments column or email me (bmdtrder@gmail.com) I can’t promise to help or advise you on trading but I will try my best to answer your query. I am also learning everyday in this market. 

Cheers! :-)