Why aren't there more long term investors?

[dcraig1]

ok - so what you are saying is that due to this high leverage that short-term trading is more lucrative ?

Potentially. However, and this is big however, that potential has to be realized. The risk is inherently higher and leverage can kill. It is difficult to blow up an account by position trading or investing in stocks if a little common sense is used. It is dead easy to blow up an account trading futures or fx using maximum leverage.

 

[Jack o'Clubs]

here we goes again !

the SUCCESSFUL daytrader will make more money than MOST long termers and the SUCCESSFUL longterm investor will make more money than a below average daytrader !

daytrading offers the ability to use MORE leverage because your exposure is a relatively short time and the drawdowns smaller than the "investor".

the "investor" has the benefit of less work but increased stress.

it all comes down to who and what you are, whats your timeframe for being able to trade, whether or not youre even vaguely interested in trading (hey, as impossible as it may be, someone might actually LIKE their work better than sitting in front of a computer and trading all day)

advantages to both, with a nod towards the GOOD daytrader because of the increased size of most trades, the rather immediate return on investment and the ability to move long or short as needs develop !

mp

Perhaps this is the key to it. As it turned out, I wasn't a particularly good day-trader and so any theoretical advantage I got from the gearing was offset by own abilities! As it happens and for whatever reason, I seem to be a dab hand at stock-picking based on fundamentals for a medium to long-term view, using TA for timing and risk management. Hence I make good money doing one, and didn't make much doing the other, so that's what's driven my trading/investment horizons rather than theory... A quick look through the City will show that there are many ways of cracking the nut of making money with money, and we're not all equally suited to each of them.

 

[nobel_1101]

ok - so what you are saying is that due to this high leverage that short-term trading is more lucrative ?

So - out of curiosity - As a return on cash, what would be considered an average mioddle-of-the-road return on cash in any 12 month period through short term trading?
100%? 500%?

I just want to compare this to a long term traders expectant return on cash.

Following on the assumption that markets are scaleless, for sake of argument, assume that identical trading strategies are employed in a short timeframe and a long timeframe. (That way we remove any biases due to the trading strategy used)

Assume the return per trade was 3% of trading capital for both, and that the average trade for short term lasts 2 weeks, whilst the long term trade lasts one year.

Therefore the long term strategy is returning 3% of total capital per annum, whilst the short term one is returning 78% (and that's without the effects of compounding).

Mathematically speaking the short term strategy will always return more, given that you have a fixed initial trading capital and require both strategies to have the same risk profile.

Craig

 

[Mathemagician]

In general...

Folks with smaller accounts take more risk (they have more to gain than lose) and have less ability to diversify, so they try to daytrade.

Folks with larger accounts take less risk (they have more to lose than gain) and can properly diversify, so they try to "invest".

There are far more people with small accounts than large, especially on a message board. Hence, there are more daytraders here than long-term traders.

jj

 

[Mathemagician]

Following on the assumption that markets are scaleless, for sake of argument, assume that identical trading strategies are employed in a short timeframe and a long timeframe. (That way we remove any biases due to the trading strategy used)

Assume the return per trade was 3% of trading capital for both, and that the average trade for short term lasts 2 weeks, whilst the long term trade lasts one year.

Therefore the long term strategy is returning 3% of total capital per annum, whilst the short term one is returning 78% (and that's without the effects of compounding).

Mathematically speaking the short term strategy will always return more, given that you have a fixed initial trading capital and require both strategies to have the same risk profile.

Craig

This does not enforce the same risk profile at all! The short-term trader can lose X% 26 times in a year, while the long-term trader can lose only X% once. The short-term trader is also forced to take a much larger position for a given level of risk, which dramatically increases "event risk". The risk profile is far higher for the short-term trader.

You'd have a better shot if you allowed the long-term trader to take multiple positions in non-correlated markets in order to normalize the risk. This brings the return from long-term trading up to par with the return from short-term trading, especially if one allows the long-term trader to capitalize his gains every two weeks (there's nothing in the real world that prevents this).

jj

 

[nobel_1101]

This does not enforce the same risk profile at all! The short-term trader can lose X% 26 times in a year, while the long-term trader can lose only X% once. The short-term trader is also forced to take a much larger position for a given level of risk, which dramatically increases "event risk". The risk profile is far higher for the short-term trader.

You'd have a better shot if you allowed the long-term trader to take multiple positions in non-correlated markets in order to normalize the risk. This brings the return from long-term trading up to par with the return from short-term trading, especially if one allows the long-term trader to capitalize his gains every two weeks (there's nothing in the real world that prevents this).

jj

The risk profile is the same taken on a trade by trade standpoint. But admittedly the risk profile is different looking on a per annum standpoint as it doesn't deal with effects of consecutive wins or consecutive losses, only looks at the average.

He could take multiple positions on the long term system but to bring the return from long-term trading up to par with short-term, he would have to take (on average) 26 non-correlated positions, which seems ambitious.

Not sure what you mean by long term trader capitalising gains every two weeks.

 

[Mathemagician]

All 26 positions don't need to be perfectly non-correlated, and 26 positions is not a lot (barely even enough, really) for a long-term trader.

Capitalizing gains every two weeks means you base your decisions on cash plus open profit/loss, adding the open p/l to the cash (on paper) every two weeks.

jj

 

[Mathemagician]

FWIW, I operate both a daytrading program and a long-term program (months to years) so I've got no bias for or against either. In fact, I believe that the optimal strategy is to trade both with risk equalized among them, as they tend to be noncorrelated. The trick is to define "risk" in a way that is consistent with one's goals since it is impossible to equalize something that is not defined properly.

Based on my analysis of my own work as well as the published returns of successful traders of both types (note that there are more published returns from long-term traders than daytraders by a wide margin), one should expect about the same risk-adjusted returns from daytrading as long-term trading.

Capacity is much, much higher for long-term traders, but the minimum starting capital for daytraders is much, much lower. Those seem to be the primary drivers of people to one or the other.

jj

 

[nobel_1101]

FWIW, I operate both a daytrading program and a long-term program (months to years) so I've got no bias for or against either. In fact, I believe that the optimal strategy is to trade both with risk equalized among them, as they tend to be noncorrelated. The trick is to define "risk" in a way that is consistent with one's goals since it is impossible to equalize something that is not defined properly.

Based on my analysis of my own work as well as the published returns of successful traders of both types (note that there are more published returns from long-term traders than daytraders by a wide margin), one should expect about the same risk-adjusted returns from daytrading as long-term trading.

Capacity is much, much higher for long-term traders, but the minimum starting capital for daytraders is much, much lower. Those seem to be the primary drivers of people to one or the other.

jj

That's an interesting concept diversifying over trading strategies of different time horizons. Have you been able to quantify how low the correlation is?
I'm assuming you would still need to make sure both strategies aren't trading the same stock/sector?/market? to get the full effect.

Craig

 

[Mathemagician]

The correlation is zero. There is no reason to favor either trading the same or different markets for this purpose. Correlation is based on daily returns (as soon as you have more than one model, and this includes scaling in/out, trade-by-trade analysis becomes meaningless -- think about it) and the dollars can't tell in which market they were earned/lost. In my case, however, the daytrading markets happen to be excluded from the long-term portfoio.

jj

 

[nobel_1101]

All 26 positions don't need to be perfectly non-correlated, and 26 positions is not a lot (barely even enough, really) for a long-term trader.

Capitalizing gains every two weeks means you base your decisions on cash plus open profit/loss, adding the open p/l to the cash (on paper) every two weeks.

jj

You mean include the effect of compounding?

Yeah, I see your point but the 26 simultaneous positions would need to be at least as uncorrelated as the 26 consecutive short trades otherwise the former would be riskier.

 

[nobel_1101]

The correlation is zero. There is no reason to favor either trading the same or different markets for this purpose. Correlation is based on daily returns (as soon as you have more than one model, and this includes scaling in/out, trade-by-trade analysis becomes meaningless -- think about it) and the dollars can't tell in which market they were earned/lost. In my case, however, the daytrading markets happen to be excluded from the long-term portfoio.

jj

I'm not sure I agree with that. If you were trading XYZ plc in both a long term and short term system, and both positions were long then correlation is 100%. There must be a little correlation, no?

 

[Mathemagician]

Well, it's a quantitive measure of correlation. There is no agreeing or disagreeing with it. It just is.

When you think about correlation don't forget that when one is long and the other short the correlation is -1. Depending on the way things work out, the -1 times can balance out the +1 times and produce a 0 correlation.

jj

 

[SuddenDeath]

Long Term investment isnt always good, we could all buy Berkshire hathaway

Why aren't there more long term investors?

As far as i can gather from this site, most people aren't long term investors.

Suirely it's less demanding that day trading or holding a position just for a few days?

Weekly analysis would do the trick.

When we measure the real return from buy and hold and use Gold rather than depreciating dollars we find the returns from holding the market arent good,

 

[mp6140]

ok, one more time and then you all can have fun

the reality of long term vs short term trading is simply that short term trading will allow you to trade BOTH the directions a currency works in during the normal day.

with long range trading, you effectively "lose" money each time the currency goes down a decent amount (the dreaded drawdown), and then make it back as the currency comes back UP.

short term trading, if being done correctly, takes its profit on the long side, then switches to the short side, or hedges or both ! This is NOT possible with longer term trades due to the nature of how trading works.

other words, give 2 equally experienced traders, the one doing the short term trades will ALWAYS beat the longer term trader, and the best of both worlds, which is a policy i follow, is to establish a core position, divide that position up into its long and short intraday side and play that length, AND daytrade the various timeframes within those moves.

but not for the newbs is playing 4 timeframes at the same time !

mp

 

[Mathemagician]

mp, you do understand that long-term traders go both long and short, right?

jj

 

[Jack o'Clubs]

When we measure the real return from buy and hold and use Gold rather than depreciating dollars we find the returns from holding the market arent good,

who said anything about 'holding the market' as being the strategy of a trader/investor with longer time horizons?

 

[nobel_1101]

Well, it's a quantitive measure of correlation. There is no agreeing or disagreeing with it. It just is.

When you think about correlation don't forget that when one is long and the other short the correlation is -1. Depending on the way things work out, the -1 times can balance out the +1 times and produce a 0 correlation.

jj

Ok fair enough. A zero correlation just seems a little too clean from a data mining standpoint.

 

[mp6140]

mp, you do understand that long-term traders go both long and short, right?

jj

============================================================

if you are speaking of "investor" style, what happens is normally buying on the dip.

now "swing" traders can work in any manner they wish, and often do, but the "usual" methodology is "normally" riding the trend, holding thru the downs, and waiting till the price hits your "profit" point ! They can also go short, but since a currency spends half the day short and half the day long, one would have to call these traders "day" traders !

Im only dealing with "normally accepted terminology" as used in the markets -- individuals can alter those definitions to their own pleasure !

mp

 

[Mathemagician]

mp, read the whole thread. We had some confusion over the use of the word "investor" earlier and clarification was given.

nobel, zero correlation means it fluctuates about zero over time but stays within the -0.2 to 0.2 range. Inputs are noisy and so is the output. I'm not sure at all where data mining enters into the picture, though.

jj