Talking Points:

  • Novice traders typically gravitate to the rush experienced with short-term trades or the 'ease' of long-term positions
  • Short-term necessitates a very strict adherence to strategy while long-term exposures require remarkable circumstance
  • Liquidity and a stable fundamental backdrop are proportionally important for trading duration

What are some of the biggest mistakes traders make, and how can you adapt for them? Download our Traits of Successful Traders trading guide.

Is it better to jump into the short-term or long-term end of the trading pool? When first wading in, ambitious traders will usually chose one of the two extremes according to their personality. Yet, there are pitfalls associated with both - and the naturally presumed 'conservative' trading may reflect more risk than many suspect. For the self-assured and aggressive, taking opportunities with quick turn around - many seeking turnaround after coming home from work and before dinner - seems ideal. While you can monitor your risk through the entirety of the trade, there are natural limits to the possible movement which in turn necessitates leverage. That means the strategy employed needs to strictly plotted out and meticulously followed. The faster the markets move against our trade, the more quickly and aggressively emotions crowd out our discipline.

Given the risks associated with short-term trading, it may naturally seem that the answer to choosing duration may be the opposite - but the answer is not that simple and lopsided. Taking positions that can last for weeks or months can be more forgiving naturally as the scale of the targets, stops and position sizing allow for more breathing room. Yet, reducing the immediate intensity of the trade doesn't inherently resolve shortcomings when it comes to probability. Projecting long-term trades with more distant objectives require a clear and uncomplicated forecast. If there are competing themes with possibly contrasting influence, the path the markets take is increasingly based on chance depending on which theme gains control of the market. Further, the potential for surprises must be held as low as possible. Preparing for surprises seems paradoxical, but a complicated and multi-tiered fundamental landscape natural amplifies the possibilities of sudden changes in focus and volatility.

Projecting longer term trades requires extreme conviction and/or extraordinary circumstances. That is to be expected when attempting to maximize probability in the exposure you take. In turn, due diligence can be just as important with this longer and slower exposure as with the intense short-term trades that more quickly burn out the unprepared investor. Conditions further play a role in which pursuit is best. Currently, most of the major markets are carving out broad congestion or struggling for traction on middling trends. These are the best times to call trends. That is true even for something that seems to have remarkable consistency over a longer period - like the S&P 500. Hindsight is 20/20 as they say, and this benchmark has risen meteorically we found the bottom after the Great Financial Crisis. Yet, what is the likelihood of entering at that ideal time, that a trader would hold for that long or that drawdowns wouldn't have encouraged an exit? Over the past 3 months, the index has spent much of its time carving out chop. Also important are circumstances for particular markets. Liquidity places a crucial role in steadfast trend versus unpredictable volatility - we can use oil and Bitcoin as examples to these extremes. We discuss the issues long-term trading helps absolve along with the unique risks that it brings in this weekend Strategy Video.

What to Understand When Calling Longer Term TradesWhat to Understand When Calling Longer Term TradesWhat to Understand When Calling Longer Term Trades

To receive John’s analysis directly via email, please SIGN UP HERE