Thoughts, Trading

Why Play for the Big Swings (a.k.a. Why Intraday Trading is Really Tough)

I just wrote some thoughts on longer-term trading vs. short-term intraday trading in my earlier book review. I think the points are good for a standalone post, so I have pasted the content below.

I have recently switched my focus from intermediate term swing trading to intra-day futures trading, and the more I delve into intra-day futures trading, the more I am realizing that moving to a higher time frame and playing for the bigger swings comes with so many added benefits:

  1. Improved accuracy in interpreting market action, which translates to improved win rate. Large institutional players play for the big moves, they have no choice. Interpreting their overall actions by looking over a longer period of time improves the accuracy of interpretation tremendously. I do appreciate that intraday scalpers are able to achieve very high win rates. While that is certainly achievable, the learning curve is way steeper than learning to interpret longer-term plays.
  2. Less susceptible to being whipped around by games played by the sharks. Sharks can manipulate the markets over a short time frame, but when you use basic conditions as your allies, no shark can swim against the tide for long.
  3. Much better emotional stability. Instead of having your heart suspended by every incoming tick, going for the big swings allows you to approach the markets in a more calm and logical manner which leads to better decision-making.
  4. More profitable. This is a view echoed by Jesse Livermore, but is of course arguable, as there are many purportedly successful intra-day traders that make millions each year. Nonetheless, my view is that a longer term time frame allows you to capture much more of the daily range compared to intraday traders that try to capture a small % of each day’s range.
  5. More time flexibility. While there is a rise in systems / automated trading, discretionary intraday traders need to sit in front of the screen ready to pounce as each opportunity comes by. If they don’t put in the screen time, they don’t make income. This is compared to longer-term players that have much more flexibility in organizing their time to perform analysis, while requiring minimal screen time to monitor positions and make adjustments.
  6. Ability to capture overnight moves. Most intraday traders would trade a particular session of the market, e.g. T session, T+1 session. Unless the trader trades near 24 hours a day, he or she is bound to miss out on significant moves that happen in other sessions, e.g. overnight gaps, T+1 session moves, etc. Position traders would be able to capture such moves with their open positions.
  7. More scalable. While this issue only comes into the picture when you have a decent pot of gold, longer-term strategies are more scalable compared to intraday strategies. I am not aware of any hedge fund that manages billions of dollars by only implementing intraday strategies.
  8. Longer moves with the same transaction costs. The transaction costs remain the same whether you are trading the long swing or a couple of ticks, so it makes more sense to play for the long swings to maximize the profits. Of course transaction costs may be lower with high volume due to intraday trading, but if you are already of a certain size, the reduction in costs is not comparable. Nowadays it is also possible for traders to obtain very competitive rates even with low volume.
  9. Execution friction and accuracy becomes less important. When you are trading for a couple of ticks, accuracy, speed, and slippage becomes critical, and final profitability will be sensitive to those factors. When you are trading for the long swing, those factors become much less important. Hence in terms of skill level required, definitely longer-term trading is much easier.

Intraday trading isn’t all bad however, some advantages are:

  1. Risk can be kept very small (relative to longer-term position trading), both in terms of the risk you take on entry, as well as the risk of getting the trade direction wrong. The risk you take on entry is kept small due to the distance to your stop. The risk of getting the trade direction wrong is kept small due to your quick reaction to changes in market trends.
  2. No overnight risk. If you flatten your position after each session, you would not bear any overnight risk. If you get the direction wrong, market gaps can easily lead to compounding of losses (e.g. averaging down).
  3. The P/L swings can be much lower, especially for volatile markets. If you take a position trade, the market can swing up and down wildly, which can be harder to take emotionally due to the corresponding large P/L swings. That might tempt to you to react to the short timeframe swings and screw up your position.
  4. Second chances on overnight moves. One thing I noticed is that even if you miss a nice overnight trend, the market tends to give you second chances to make those gains, because the big boys that missed it would reverse the market so that they can participate as well.
  5. Able to have double, triple dips. As the price moves from point A to B, it trends up and down intraday over a number of sessions. Good intraday traders will be able to milk that range multiple times. Note though that it is not easy to develop that kind of a skill. The choppiness of intraday trading would also result in stop outs that would eat into your profits.




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