Friday, December 18, 2009

Making the Transition From Daytrading

It is not unusual for traders who begin as active, intraday traders to transition to a longer-term style of trading. There are several reasons for this:

1) Opportunity - Excellent historical patterns occur on a multiday time frame, allowing traders to capture larger moves with fewer trading decisions. Note, for instance, that many of the patterns researched by such sites as Quantifiable Edges, Market Tells, SentimenTrader, and Market Rewind extend over multiple trading days.

2) Lifestyle - Following markets tick by tick, day after day, can be taxing; it also leaves little time for other productive activities during the regular trading day. By extending one's time horizon, one can fully participate in markets, while leaving time free for other productive and recreational pursuits;

3) Trading Style - Longer-term trading takes advantage of fundamental relationships, as well as price-based ones, and lends itself to decision-making based upon sound research into company, economic, monetary, and intermarket factors, as well as sentiment and technical patterns. Such a research-intensive style works well for analytically-oriented traders; the longer time frame affords them the time for such research.

Often, the transition from daytrading to longer-term trading is not an easy one. Traders accustomed to being glued to the screen often find themselves following their longer-term trades too closely, micromanaging them as a result. Too, traders accustomed to managing risk on an intraday basis have to adjust to the wider swings that occur over multiple days. Sizing positions to account for the rise in volatility with longer holding periods is critical.

Psychologically, longer-term trading does not afford the immediate gratifications of short-term trading. Rather, much of the gratification from the longer-term trade comes from generating and executing the idea and managing the position once it's on.

An additional advantage--and gratification--of longer-term trading is that it enables traders to trade and follow multiple markets and carry/manage multiple positions. That can be difficult to accomplish for very short-term traders. The longer timeframe trader relies less on leverage in individual positions and can spread risk across multiple ideas, potentially achieving a higher degree of diversification.

In future posts, I will track some patterns that extend over multiple day periods to illustrate how short-term trading skills can be ported to longer time frames.