Sunday, November 09, 2014

11 Long-term versus short-term trading

11 Long-term versus short-term trading

I am frequently asked which is more profitable, long-term or short-term trading. Obviously, there are pros and cons to each approach, and my answer is, you should use whichever works best for you. ln my own trading, however, I adhere to a dual strategy. That is, I am a long-term trader on my winning positions and a short-term trader on my adverse

ones. That makes sense to me. If the market’ is moving favourably (your position is with the prevailing trend) and your trading is profitable, hold the position for as long as possible. Don't try to pick of tops and bottoms, because it isn't possible to do it with any degree of consistency. But, if you determine that your position is counter to the prevailing trend and the loss is becoming bigger, get out as soon as possible.

How long should you hold a profitable position? As long as possible. My biggest profits, in both wheat and copper, have been on positions held about nine months and I once held a long position in sugar for five years. Of course l had to roll the long position over as
each future expired and occasionally was stopped out by an extreme counter-trend reaction, but I got back aboard each time as quickly as possible.

If it seems more difliailt to make good long—term profits than it used to be, the fault is less with the markets and more with the players. The focus of most technical traders, in both securities and commodities, has become increasingly short-term and micro—oriented, due mainly to two factors:

0 Increased volatility and seemingly random price action resulting from enormous sums of speculative money being thrown at markets that lack suflicient breadth and institutional participation to cope with the huge influx of orders.
Figure 11.1 Long-Term Monthly (Nearest Future) Sugar. Talk about
needin patience! I accumulated a big long position in 1967-68 around
the 2.(§§ level, right before it plummeted to 1.33. I lost some one third of
the posi'ri'on on this drop, and held on to long sugar for two years before
the marker broke out of its long sideways range and started moving up.
Once on the move, however, the bull market lasted five years, culminating
at the 60.00-plus level in late 1974. '

0 The proliferation of powerful micro-computers and software programmes that focus on short-term trading swings, convincing many technical operators that this is the new wave of the marketplace and the preferred way to trade.

Indeed, this is the day of the tick-by-tick computerized chart, continuously on-line and updating during every moment of each trading session. For only a modest monthly expense, virtually any trader can now have five minutes (or less) bar charts, with any number of technical indicators interposed on the charts, flashing across his colour monitor in rapid succession, or being printed on hard copy. just imagine, trading against a ‘triple top’ formation created during a single 30 minute segment of a trading session.

I had a graphic demonstration of this micro-analysis recently, when
a trader called to ask what I thought about the ‘head and shoulders’ top


Figure 1.2 Daily chart of HANG SENG (CASI-I.) Imagine looking for a head an shoulders top formation in early December 1993 at the 9,937 level.

formation he had identified in Hang Seng. I could only reply with ‘what head and shoulders top are you talking about? Which market are you talking about?’ In fact, I had been watching the same market he had been referring to, solidly entrenched in a strong and dynamic
uptrend. I was long this market and I hadn’t detected anything remotely resembling a top formation. Under further questioning from me, the gentlemen admitted that his ‘top formation’ had occurred during a brief period that morning. I reminded him that he was watching a very minute price consolidation taking place within an ongoing strong bull trend and that I wasn’t very impressed with his analysis. I advised him to look for a spot to buy, rather than to sell. The market apparently, shared my opinion, for by the close, we were registering new highs. The triple top formation had been sundeted as if it didn't exist, which it didn't! (See Figure 1 1.2.)
This trader's micro-oriented approach to short-term scalping is the exact opposite of long-term position trading, which provides the best opportunities for consistent profits and limited risk. Adhering to a strategy of focusing primarily on the longer-term trends allows one to avoid being distracted by inrra-day market ‘noise’ and to maintain a better perspective on market trend action. How can the trader sitting in front of a five-or-three—minute tick-by-tick chart have any balanced
perspective of a market? Three or four hours is long-term to him. For most of the market which I follow, I find particular usefulness in reviewing long-term charts, that is, weekly and even monthly bar charts. Such a longer-term view tends to provide me with a better
balanced perspective of market action. I sometimes wonder how many people watch such long-term charts and indicators, versus those who follow short-term five and ten minutes, or even tick-by-tick charts. Not very many, I should think.

Merging short-term and long-term techniques into a trading strategy
For aggressive and experienced traders, there is an interesting approach which involves combining short- and long-term indicators into a viable trading method. The first step is to identify the major, prevailing trend of each market. There are as many different» techniques of trend identification as there are traders and indeed, many operators simply use a subjective inspection of a chart as the basis for determining trend direction. This may be useful and accurate, in the hands of an experienced and disciplined operator but for many observers, it is
entirely too subjective and discretionary an approach. Most traders have some degree of market bias. For instance, I admit to being biased towards the long side of soybean futures and if given a neutral type of trend analysis, I am much more prone to buy than to sell. W/hat we seek here is a neutral, unbiased and objective approach to trend analysis.

At the outset it should be noted that the particular moving average values presented here are not the ones I specifically use. They are presented for illustration only, as they are close to, and representative of, the moving average values that are used by many successful traders.
Each trader will have to test technical methods to derive the indicators and formulae which best suit his purposes and his trading style. One particular method, simple and straightforward, that some traders use for long-term trend indentification is a 50-day simple moving average versus the close of a daily bar chart. It works as follows:
1. The trend is up if:
(a) The closing price is above the moving average line and
(b) The slope of the moving average line is up.

2. The trend is down if:
(a) The closing price is below the moving average line and
(b) slope of the moving average line is down.
(b)%Th lp fh 'g gl"d

There are a multitude of trend identification methods, some of which are very complicated, but this is quite simple and it is more effective than most methods. Another advantage of this method is that it is objective and totally unbiased. As a purely mathematical approach, it
is simple and direct. Furthermore, sideways markets tend to show a non—directional moving average line that is close to being equivalent to the price line. These markets are deemed sideways, and should be avoided for this particular trend—following strategy.
From this objective method of trend identification it is possible to formulate the following rules:

9 In an uptrend, carry long positions only, or else stand aside. No short positions.
0 In a downtrend, carry short positions only, or else stand aside. No long positions.

The next step is to formulate entry and exit rules and for this discussion, we will use the following rules:

0 For long-term analysis use the close versus three simple moving
average 10-day, 20-day and 50-day.
—buy when close > 10-day > 20-day > 50 day.
— Sell when close < 10-day < 20-day < 50 day.
0 For short-term analysis, use the close versus three simple moving
averages, 4-day, 9-day and 18-day.
-— Buy when close > 4-day > 9-day > 18-day.
— Sell when close > 4-day > 9-day > 18-day.

To coordinate the total strategy:

0 In an uptrend (using the 50-day simple moving average) buy on
the long-term signal, that is; close > 10-day > 20-day >
50-day.

Stop out the trade (liquidate only, do not go short) using the short-term signal, that is; close < 4-day < 9 day < 18-day. If you are stopped out and the trend continues up (based on the
50-day simple moving average) re-enter long on the short-term buy signal, that is; close > 4-day > 9-day > 18-day. 0 In a downtrend (using the 50-day simple moving average) sell on
the long-term signal, that is; close < 10-day < 20-day < 50-day.
Stop out the short position (liquidate only, do not go long) using

lkthe short-term signals, that is; close < 4-day < 9-day < 18-day.
If you are stopped out and the trend continues down (based on the 50-day simple moving average)r

Re-enter short on the short-term sell signal, that is; close < 4-day < 9-day < 18-day. rditional stop protection, you might use an exit stop based on 70% of margin, in case the indicator-based reversal fiip is slow in getting you out.

To summarize long-term trend analysis:
0 The basic long-term trend is determined by the 50-day simple moving average versus the closing price. If the trend is up, trade long or stand aside. No short positions. If the trend is down, trade short or stand aside. No long positions. If your basic long position is stopped out, using the short-term strategy, do not go short. If the 50-day simple moving average remains long, re-buy the position on a buy signal from the hort-term strategy. f your basic short position is stopped out, using the short-term strategy, do not go long. If the 50-day simple moving average remains short, re—sell the position on ‘a sell signal from the short-term strategy.

2. The trend is down if:
(a) The closingfigprice is below the moving average line and
(b) The slope of the moving average line is down. There are a multitude of trend identification methods, some of which are very complicated, but this is quite simple and it is more effective than most methods. Another advantage of this method is that it is objective and totally unbiased. As a purely mathematical approach, it is simple and direct. Furthermore, sideways markets tend to show a non-directional moving average line that is close to being equivalent to the price line. These markets are deemed sideways, and should be avoided for this particular trend-following strategy. From this objective method of trend identification it is possible to

formulate the following rules:

0 In an uptrend, carry long positions only, or else stand aside. No short positions.

0 In a downtrend, carry short positions only, or else stand aside. No long positions.
The next step is to formulate entry and exit rules and For this discussion, we will use the following rules:

 0 For long-term analysis use the close versus three simple moving averages: 10-day, 20-day and 50-day.
— Buy when close > 10-day > 20-day > 50 day.
— Sell when close < 10-day < 20-day < 50 day.

1 4 1
For short-term analysis, use the close versus three simple moving averages, 4-day, 9-day and 18-day.
— Buy when close > 4-day > 9-day > 18-day.
— Sell when close < 4-day < 9-day < 18-day.

To coordinate the total strategy:
In an uptrend (using the 50-day simple moving average) buy on the long-term signal, that is; 

close > 10-day > 20-day >;50-day.

Stop out the trade (liquidate only, do not go short) using the
short-term signal, that is; close < 4-day < 9 day < 18-day.

If you are stopped out and the trend continues up (based on the
50-day simple moving average) re-enter long on the short-term
buy signal, that is; close > 4-day > 9-day > 18-day.

In a downtrend (using the 5O-day simple moving average) sell on
the long-term signal, that is; close < 10-day < 20-day <
50-day.
Stop out the short position (liquidate only, do not go long) using the short~term signals, that is; close < 4-day < 9-day < 18-day. If you are stopped out and the trend continues down (based on
the 50-day simple moving average) re-enter short on the short-term sell signal, that is; close < 4-day < 9-day < 18-day. For additional stop protection, you might use an exit stop based on
70% of margin, in case the indicator-based reversal Hip is slow in getting you out.

To summarize long-term trend analysis:
The basic long-term trend is determined by the 50-day simple
moving average versus the closing price.
If the trend is up, trade long or stand aside. No short positions.
If the trend is down, trade short or stand aside. No long
positions.
If your basic long position is stopped out, using the short-term
strategy, do not go short. If the 50-day simple moving average
remains long, re-buy the position on a buy signal from the
short-term strategy.
If your basic short position is stopped out, using the short-term
strategy, do not go long. If the 50-day simple moving average
remains short, re-sell the position on ‘a sell signal from the
short-term strategy.

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"There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time."J Livermore Manchester City FCl Crude Palm Oil

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THE END OF AN ERA

From Dragons and Bulls by Stanley Kroll
Intro and Foreword
The Importance of an Investment Strategy
5 The Art of War, by Sun Tau (circa 506 BC) and The Art of Trading Success (circa AD 1994)
That's the way you want to bet/a>
Long-term v Short term trading
Technicals v Fundamentals
Perception v Reality
Part 1: Winners and Losers
Part 2: Winners and Losers
Sun Tzu: The Art of War
Those who tell don't know, those who know don't tell
Why there is no such thing as a "bad market"
The Secret to Trading Success
The Experts, do they know better?
Risk control and money management
Good advice
The 'good bets' business by Larry Hite
Don't lose your shirt
Ed Sykota's secret trend trading system