ravi
12th January 2009, 03:41 PM
For years, the arguments have gone back and forth: which is better,
day trading or position trading?
We have heard many day traders say they prefer day trading
because that way they leave less money lying on the table. They
bemoan the plight of the poor position trader who is unable to
extricate himself from a bad trade as quickly as can the day trader.
They are of the opinion that they are able to extract profits quickly,
while they are available. They enjoy the thrill of daily combat in the
market place. Day traders also are of the opinion that they have
more opportunities than do position traders. Finally, and importantly,
day traders feel comfortable in not holding any positions overnight,
and therefore are able to sleep without fear that they will awaken to
some horrible unexpected gap in prices that will wipe out any profits
that may have accrued, and which could result in a huge loss.
Of course, position traders hold just the opposite view. They feel that
it is the day trader who is leaving the most money lying on the table.
They feel that day trading erodes their capital base with excessive
transaction costs. They pity the day trader who has to fight his way
into a trending market numerous times throughout the day, often
getting badly beaten up for his trouble, whereas they, the position
traders, get to take advantage of the longer term trend. Position
traders are not burdened with sitting in front of a screen throughout
the day. They would rather be free to enjoy other aspects of life, and
avoid the frantic trading often required of day traders. Position
traders contend that with so many choices from which to choose,
there is no lack of opportunity for entering well-thought out, well-
planned trades. Finally, position traders take great comfort in
knowing that when a market truly begins to trend and yields huge
rewards relative to risk, that they will be in the market and will not
miss the move.
Who is right? They are both right, or they are both wrong. It depends
upon your point of view and where you are most comfortable.
The choice of time interval in which to trade is a function of comfort
level: economic comfort level, emotional comfort level, or
psychological comfort level, maybe all three. It is also a function of
financial capability and trading acumen.
It is the knowledgeable trader who makes the most money. The
trader who knows himself, knows how to read a chart, and is
knowledgeable about the inner workings of the markets makes the
most money, but even then, only if his knowledge is accompanied by
disciplined action, disciplined decision making, and sufficient capital
to comfortably support his style of trading and the time frame in which
he attempts to trade.
Sometimes a combination of both day trading and position trading is
in order.
Combining the two may be a good strategy for the position trader
attempting to optimize his entries to and exits from the market by day
trading an intraday chart at the specific times of entry and exit.
Combining the two may be a good strategy for the day trader who
determines to hold a winning position overnight in those situations
where a protective stop loss is able to be moved to where it is a profit
protecting position.
Each trader will have to give up something in order to gain a feature
enjoyed by the other. For example, the day trader will have to give
up not holding overnight and miss being able to enjoy the benefits of
the longer term trend.
The position trader, provided he has the time and ability to monitor
the market during the day, will have to acquiesce to being tied to a
screen for whatever amount of time it takes to day trade his entries
and exits in an attempt to optimize them. If unable to watch during
the day, it will be rather difficult to optimize entries and exits.
Let's take a look at each of these propositions to see how such a
trading philosophy might work out.
IMPLICATIONS OF DAY TRADING FOR THE POSITION TRADER
If a position trader has access to live data, and the free time to
monitor the price action at such times as he wishes to enter or exit
the market, he can often optimize the results of those events by
engaging in a bit of day trading. Let's look at one situation in which
this might be done.
Let's assume that the position trader is seeking either entry or exit on
a day where prices open with a huge gap within or immediately
outside of a congestion area.
The percentages favor a reaction of some sort back towards the
previous day's close. Usually, such a reaction will take place on the
day of the gap. Occasionally the reaction will be delayed by a day.
Gap openings within or immediately outside of congestion
areas will usually result in a reaction wherein prices move back
towards the previous day's close. This one piece of knowledge is
worth many times the price of most books and manuscripts you are
likely to have to pay for.
Now, let's look some probable positions held by a position trader. By day trading, the position trader can take advantage of that knowledge in light of the following scenarios:
THE GAP IS FAVORABLE:
Knowing that most gap openings within or immediately outside of
congestion result in a reaction with prices moving back towards the
previous day's close, the position trader willing to day trade and
desiring to reap the profits available from the reality of the gap, can
exit immediately upon seeing the gap.
THE GAP IS UNFAVORABLE :
Knowing that most gap openings within or immediately outside of
congestion result in a reaction with prices moving back towards the
previous day's close, the position trader desiring to extract the most
profits possible will wait for the reaction to the gap, and attempt to exit
at a more favorable price than he might have otherwise obtained.
IMPLICATIONS OF POSITION TRADING FOR THE DAY TRADER:
If a day trader is willing to hold overnight when his trade has
accumulated acceptable profits, the day trader can often benefit by
doing so when prices are strongly trending.
The trader must have seen sufficient profits in the trade by the time of
the close to be able to place a profit protecting stop in the market.
The percentages of a trend continuing once it is strongly trending are
very high, and definitely favor holding overnight.
IMPORTANT POINTS
Be sure that prices are truly trending. An acceptable trend is one
that is moving at an angle of 45 degree or greater. Quite often,
falling prices will exhibit a greater than 45 degree angle, especially
at the beginning. Overall, prices tend to fall 1/3rd faster than they
rise.
•
Realize that there will be some sort of reaction to every gap
opening. Do not let that panic you out of a trade. Decide
beforehand exactly how much of your profits you want to protect,
and stick with your plan.
•
Occasionally, prices may jump over your protective stop, possibly
resulting in a losing trade from what was once a winning trade.
•
When a trend becomes too steep, and the trend line becomes
parabolic, you are near the end of the trend. Tighten stops
considerably, or consider exiting entirely
day trading or position trading?
We have heard many day traders say they prefer day trading
because that way they leave less money lying on the table. They
bemoan the plight of the poor position trader who is unable to
extricate himself from a bad trade as quickly as can the day trader.
They are of the opinion that they are able to extract profits quickly,
while they are available. They enjoy the thrill of daily combat in the
market place. Day traders also are of the opinion that they have
more opportunities than do position traders. Finally, and importantly,
day traders feel comfortable in not holding any positions overnight,
and therefore are able to sleep without fear that they will awaken to
some horrible unexpected gap in prices that will wipe out any profits
that may have accrued, and which could result in a huge loss.
Of course, position traders hold just the opposite view. They feel that
it is the day trader who is leaving the most money lying on the table.
They feel that day trading erodes their capital base with excessive
transaction costs. They pity the day trader who has to fight his way
into a trending market numerous times throughout the day, often
getting badly beaten up for his trouble, whereas they, the position
traders, get to take advantage of the longer term trend. Position
traders are not burdened with sitting in front of a screen throughout
the day. They would rather be free to enjoy other aspects of life, and
avoid the frantic trading often required of day traders. Position
traders contend that with so many choices from which to choose,
there is no lack of opportunity for entering well-thought out, well-
planned trades. Finally, position traders take great comfort in
knowing that when a market truly begins to trend and yields huge
rewards relative to risk, that they will be in the market and will not
miss the move.
Who is right? They are both right, or they are both wrong. It depends
upon your point of view and where you are most comfortable.
The choice of time interval in which to trade is a function of comfort
level: economic comfort level, emotional comfort level, or
psychological comfort level, maybe all three. It is also a function of
financial capability and trading acumen.
It is the knowledgeable trader who makes the most money. The
trader who knows himself, knows how to read a chart, and is
knowledgeable about the inner workings of the markets makes the
most money, but even then, only if his knowledge is accompanied by
disciplined action, disciplined decision making, and sufficient capital
to comfortably support his style of trading and the time frame in which
he attempts to trade.
Sometimes a combination of both day trading and position trading is
in order.
Combining the two may be a good strategy for the position trader
attempting to optimize his entries to and exits from the market by day
trading an intraday chart at the specific times of entry and exit.
Combining the two may be a good strategy for the day trader who
determines to hold a winning position overnight in those situations
where a protective stop loss is able to be moved to where it is a profit
protecting position.
Each trader will have to give up something in order to gain a feature
enjoyed by the other. For example, the day trader will have to give
up not holding overnight and miss being able to enjoy the benefits of
the longer term trend.
The position trader, provided he has the time and ability to monitor
the market during the day, will have to acquiesce to being tied to a
screen for whatever amount of time it takes to day trade his entries
and exits in an attempt to optimize them. If unable to watch during
the day, it will be rather difficult to optimize entries and exits.
Let's take a look at each of these propositions to see how such a
trading philosophy might work out.
IMPLICATIONS OF DAY TRADING FOR THE POSITION TRADER
If a position trader has access to live data, and the free time to
monitor the price action at such times as he wishes to enter or exit
the market, he can often optimize the results of those events by
engaging in a bit of day trading. Let's look at one situation in which
this might be done.
Let's assume that the position trader is seeking either entry or exit on
a day where prices open with a huge gap within or immediately
outside of a congestion area.
The percentages favor a reaction of some sort back towards the
previous day's close. Usually, such a reaction will take place on the
day of the gap. Occasionally the reaction will be delayed by a day.
Gap openings within or immediately outside of congestion
areas will usually result in a reaction wherein prices move back
towards the previous day's close. This one piece of knowledge is
worth many times the price of most books and manuscripts you are
likely to have to pay for.
Now, let's look some probable positions held by a position trader. By day trading, the position trader can take advantage of that knowledge in light of the following scenarios:
THE GAP IS FAVORABLE:
Knowing that most gap openings within or immediately outside of
congestion result in a reaction with prices moving back towards the
previous day's close, the position trader willing to day trade and
desiring to reap the profits available from the reality of the gap, can
exit immediately upon seeing the gap.
THE GAP IS UNFAVORABLE :
Knowing that most gap openings within or immediately outside of
congestion result in a reaction with prices moving back towards the
previous day's close, the position trader desiring to extract the most
profits possible will wait for the reaction to the gap, and attempt to exit
at a more favorable price than he might have otherwise obtained.
IMPLICATIONS OF POSITION TRADING FOR THE DAY TRADER:
If a day trader is willing to hold overnight when his trade has
accumulated acceptable profits, the day trader can often benefit by
doing so when prices are strongly trending.
The trader must have seen sufficient profits in the trade by the time of
the close to be able to place a profit protecting stop in the market.
The percentages of a trend continuing once it is strongly trending are
very high, and definitely favor holding overnight.
IMPORTANT POINTS
Be sure that prices are truly trending. An acceptable trend is one
that is moving at an angle of 45 degree or greater. Quite often,
falling prices will exhibit a greater than 45 degree angle, especially
at the beginning. Overall, prices tend to fall 1/3rd faster than they
rise.
•
Realize that there will be some sort of reaction to every gap
opening. Do not let that panic you out of a trade. Decide
beforehand exactly how much of your profits you want to protect,
and stick with your plan.
•
Occasionally, prices may jump over your protective stop, possibly
resulting in a losing trade from what was once a winning trade.
•
When a trend becomes too steep, and the trend line becomes
parabolic, you are near the end of the trend. Tighten stops
considerably, or consider exiting entirely