Trend Following vs Short Term Trading
Trend following vs short term trading: in this video, Nick Radge discusses factors to consider when deciding whether to be a short term trader or a long term trader using a trend following method.
When we’re looking at systems to trade, we’ve got to look at what each system offers in its entirety and decide whether or not it suits us.
The major part of trend following is not an income. So you should have another strategy building income in the background.
Trend following is low-maintenance and generally low-cost. You allow dividends to work for you.
Short-term traders on the other hand are going to pay a lot of brokerage. You’re going to spend a lot of time placing trades (unless you use an API to automate the process). Time is money. You’re not going to have dividends working for you. The broker is going to be doing very, very well out of you.
I had these guys come to me a few years ago saying, “Nick, we want to create a casino for what was called the DAX Index or the Euro Stoxx, which was the big German Index. Very, very liquid market. And they said, “We want to do about 150 trades a day. “Well,” I said, “We can probably do that. “But for every 20 grand you make, your broker’s going to make make 150 grand. If you’re okay with that, we can do it.”
And at first, they were okay with that. So we spent the next four or five months developing a system and then it just clicked. They realised “I should actually be the broker, not the trader.”
Short term trading is sexy
Everyone wants to be a short-term trader. It’s glamorous, it’s sexy. But you have everything working against you. The brokerage. Slippage is a major issue. Slippage is where you want to get and where you actually get out is a real cost when you’re a short-term trader.
With a trend following method, it doesn’t matter. I bought a stock in the Growth Portfolio. The stock traded, closed at $6.25. I put a bid in and the next day I got set at $6.35, so there’s 10 cents slippage. Now a short-term trader, that’s their whole profit margin right there, gone. But because I’m looking for the next $2, $3, $4, $5 move, 10 cents is not an issue.
For shorter term time frames, slippage, dividends, everything becomes a cost.
Another important factor is patience. Many people don’t have patience when it comes to following longer term trends. They get bored, they want action. They want to place a trade, they want to take a trade off. So patience with trend following is also very important. If you don’t have patience, maybe trend following’s not for you.
