In my experience, if you attempt to watch every tick and trade in and out of the market many times a day, your returns will be lower than trading off 30 minute, or even 1 hour or daily data.  This is because your trading systems will find it much harder to identify trends, and because your transaction costs as a proportion of profits will significantly increase.  You can run a simulation yourself to confirm this.

This is why analysis of day traders shows a far higher probability of loss for short term traders (who are off the floor) than those who hold assets for longer periods.  Don’t think that a stock trader who realises 2% one day should be able to earn 500% per annum by switching in and out of the market.  We all know that this doesn’t happen.

My recommendation is to avoid thinking that you can somehow outsmart the market by choosing a very short trading interval, and instead choose a timeframe that allows your trading system to work, that matches your risk profile and that maximises your real trading profit after transaction costs.

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Tags: holding periods, timeframes, trading, Trading Basics, volatility

This entry was posted on Friday, May 23rd, 2008 at 2:17 pm and is filed under Trading Basics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.