Why Short-Term Traders Lose Money

Chris (fictitious example, but real trading results) is a trader of the S&P 500 market. He is disciplined and selective in his trades. He limits his trades to those that go with the longer-term and shorter-term trends. If the market is not trending in his direction, he does not trade.

Seeing a long bias to the recent market, Chris has developed a trading method that is long only. He looks at the Bollinger Bands (volatility envelopes) surrounding the 20-day moving average for the S&P 500 Index (SPY). If we close above the upper band/envelope, he buys the market on close. If we return to the area between the bands, he exits the position to limit losses. His idea is to participate in strong trending markets.

Chris averages 3 days per trade as his holding period. Over the past two years, his method has provided him with 18 trades. He has never deviated from this approach during that time.

Yesterday Chris tallied up the results from two years of trading. He was profitable on 3 trades, unprofitable on 15. He made a total of 1.34 SPY points (13.4 ES points) from his profitable trades. He lost 10.30 SPY points (100.30 ES points) from his losers. Overall, Chris lost about 90 S&P points trading long positions in a bull market with perfect market discipline and psychology.

He had an effective system--if he had traded it in reverse. Traders need to understand how markets move on *their* time frame. Much losing of money among short-term traders can be traced to the mistake made by Chris. What occurs on the longer time frame and at shorter time frames can be quite, quite different.