What is long term trading?
There is no formal definition – which doesn’t help – but generally I categorise them as follows:
- Short-term – the aim is to be in and out of a trade within hours or days (to include day traders and scalpers)
- Medium term – the aim is to be in a trade for a few days to a few weeks
- Long term – to aim to be in a trade for weeks, months or even a year plus
These categories are the aim of the trade. It does not mean that we are restricted to staying in a trade which is going against us, or that we must exit a trade because our time is up. It purely applied to our intentions at the outset.
Once we start looking to be in trades for over a year I generally categorise it as investing – and into the realms of fundamental analysis – rather than technical trading. This is a completely different skillset and these people will probably be wanting to gain income (such as interest or dividends) in addition to capital growth.
In this article I will look at 5 reasons long term trading can work to your advantage.
Fewer opportunities required
One of the main advantages of long term trading is you aren’t required to find new opportunities every day. Finding good trades is the hardest aspect of trading because no-one knows how price will develop in the future.
There will always be losing trades – our success relies on our winners making more money than our losers lose. When trading long term we can stick with the winners – rather than cashing out and having to look for a new opportunity.
Every year there are a few good trends across the asset classes. Once we find them we need to stick with them as long as we can – and extract as much from the trend as we can.
And every year there are several so-called “once-in-a-lifetime” opportunities. These make up the bulk of our portfolio – but there will be a number of less successful or losing trades along the way. By hanging on and adding to our winners we can absorb many small losses (even if there are rather a lot of them).
While we ride the trend there will be pullbacks. It pays to take a more holistic approach to the overall big picture (and stay in the overriding trend) rather than try to be greedy (and attempt to buy all the dips and sell all the rallies). This is an inefficient approach especially during a good linear trend as the pullbacks will be small and shallow.
If you could trade five or six really good trends (moving very well over a few months) every year, would you still need to look for more opportunities? Of course, we have to find them. And this leads us on to the second advantage of long term trading – as we are spending less time trading we can, instead, spend more time planning.
More time to plan
It’s always easy to identify a good trend with hindsight. But we have to make our decisions at the right hand side of the chart.
By knowing you are looking to take a trade over weeks or months we can concentrate on analysing higher timeframes. At the Dynamic Trader we use:
- Monthly, weekly and daily timeframes for analysis
- Weekly or (more often) the daily timeframe for trade set-ups
Much of the noise (for example gaps and irregular candlesticks) is removed by looking at the daily timeframe (and above). If there is still an array of mishaps (such as large ranging bars with disproportionately long wicks) then we can disregard the chart as not suitable for our purpose – there are plenty more to choose from.
We also abide by the 3 second rule – if you can’t identify a good chart within 3 seconds of opening it then it should be discarded. Do not be concerned with scarcity – there are so many choices to trade it is difficult not to find a good one. Plus, if there really aren’t any trends in play then you need to be bold – and wait.
By removing the noise we can see more clearly where lines of support and/or resistance lie. This is the foundation of technical trading. There are a variety of commonly used levels, such as horizontal pivot points, to angled measures, such as a moving average. If price is below one of these levels then it is likely to act as resistance (possibly preventing price from moving higher). If price is above one of these levels it is likely to act as support (possibly preventing price from going lower).
Support and resistance is fundamental to chart and candlestick formations, too. These patterns are often described as a fight between the bulls (traders who want price to move higher) and the bears (traders who want price to move lower). These traders, en masse, will have a price below or above which they are prepared to let price fluctuate around, but beyond this, they are likely to accept defeat and remove themselves from the market.
By being able to clearly identify horizontal lines of support/resistance and any patterns we have more confidence that price will move in a more predictable way. This is nearly always easier on a larger timeframe. Technical trading for Dynamic Traders relies on probability – it is never a “sure thing” but there are certainly instances where future price action is a “pretty sure thing”.
As touched upon, in the last section, technical trading doesn’t have to be complex.
The smaller the timeframe traders trade, the more they have to rely on intricate indicators. Because they cannot see the wood for the trees they have to use ever more complicated tools to help them identify what they can no longer see. They do not have the time to plan – which means they cannot differentiate between strong and weak support/resistance reversal zones. They are therefore obliged to get in and out quickly – without ever realising (until after the event) if price had the potential to move further in the trade direction.
When we take a step back, and give ourselves room to breathe, we can see the bigger picture. As when completing a jigsaw puzzle we have to take a logical approach. First we identify what we know (the ‘corner’ pieces) then we identify how to fit them together (with the ‘edges’) and, finally, we can build up the rest of the picture.
In trading we can take a similar puzzle-solving approach:
- First, identify major areas of support/resistance (does a trend have room to develop?)
- Second, look for chart/candlestick patterns (do they reinforce a trend continuation?)
- Finally, look for a logical and high probability point of entry and manage the trade
At the Dynamic Trader we have a number of simple trading tools to help us with this approach – as we want to exclude those charts which do not offer us the very best opportunities and, at the same time, we want the optimum entry and trade management techniques. Our trading tools help minimise losing trades and maximise profits from winning trades – but it is still possible to obtain trading success by following the simple rules above.
The advantages of long term trading is that you do not have to time your entry and exit precisely. So you do not require complex indicators to help you with timing or trend identification. If you miss fifty or a hundred ticks in a big trend, does that hugely affect your bottom line?
Do you feel that you’re not a “real trader” unless you’re under immense time and financial pressure to perform? This is how trading is depicted in much of the media – split second, make-or-break gut decisions on which some poor individuals future hangs by a thread.
Clearly, if someone is trading on lower timeframes, they do not have time to consider their choices. If a trader is trading a five-minute chart then there is very little time to decide if the next bar will be higher/lower and therefore worth trading. This has two clear disadvantages: first, if a decision is not made then no money is made and, second, there is no time to check if there’s a better opportunity elsewhere.
When buying any other large ticket purchase (such as a house, car or even a vacuum cleaner) we wouldn’t limit ourselves to only a few seconds to make up our minds.
Of course the fact that we can make a quick decision doesn’t mean to say we should. We should never confuse action with decisiveness. We need direction, too.
Anyone in a high pressure job usually experiences burn-out within a few years. With long term trading there is little to no stress involved.
The advantages of reducing stress means that your right and left brain can function together:
- Left brain: analytical thought, logic, knowledge, rules
- Right brain: big picture, understanding, pattern recognition, risk
In his book “Thinking Fast and Slow” Daniel Kahneman identified that thinking quickly was not to our advantage the majority of the time – it did not give us time to judge the situation to the best of our ability. Most of the time this is not a problem – for everyday tasks. But trading (for the majority of people) is a unique task which requires, at least for the first few years, slower and more considered thinking.
Kahnmann categorised his findings as follows:
- System 1: Fast, automatic, frequent, emotional, stereotypic, subconscious
- System 2: Slow, effortful, infrequent, logical, calculating, conscious
This clearly shows that slow thinking is more appropriate to the traits required for trading. So take time over your analysis. And you can do this – and make well thought out decisions – by trading from a daily, or higher, timeframe.
Trading long term will give you confidence that you made the best choice based on the information you had available to you at the time. You won’t always be ‘right’ (the market can upset even the most high probability set-up). But you will have conviction in your ability to make good decisions – and over time the payback will be a high yielding equity curve – with little effort.
This is my favourite advantage of long term trading. Less work!
It is logical to conclude that if you have fewer bars to analyse then your analysis must be over in a shorter time. If a new bar is only being printed monthly, weekly or even daily there’s only so much you can do before you start repeating your analysis.
Earlier in the article I said that most Dynamic Traders trade from a daily chart. But this does not require analysis on a daily basis. Most of the ground work can be done at the weekend by identifying where the trends are. As mentioned before, Dynamic Traders have a number of tools to help identify tradeable charts – some of which are just beginning to trend (most trades will start this way) and others where trends are established (we will look to manage or add to our positions).
There is a weekly weekend routine you can follow, too.
- Identify the trend on the monthly, weekly and daily charts (bullish if above the 200 line and any major resistance zones; and bearish if below the 200 line and any major support zones) – discard those which do not agree on all three timeframes
- Identify recent price action (chart and candlestick patterns on any of the three timeframes)
- Compile your watch list for the week ahead with any charts which looks close to a good entry (a defined breakout or pullback opportunity)
Then, on a daily basis, you are simply required to:
- Check your watch list to see if any set-ups have occurred
- Place an order if a set-up has occurred
- Check to see if positions need managing (i.e moving the stop closer to price action or adding to the trade if trending well)
It will take some time to build up your watch list so stick with it – eventually you will have a great high-value set of opportunities to trade. Remember to include as many asset classes as you can afford to trade (e.g. stocks, forex and commodities). This will give you access to the best (potential) trends.
Once you have a good watch list it will only take you a couple of hours, at the most, each weekend to see if anything needs adding or removing. And each day it will take you a matter of minutes to check the list for new set-ups – and to manage any trades.
Less work means more play – so you have the rest of the day to sit back and relax with your favourite pastime!
Trading doesn’t have to be hard work, time-consuming, difficult or stressful.
Yes, it takes time to build up to this lifestyle – success is rarely achieved overnight. But, once mastered, long term trading will empower you to truly be in charge of your own life.
Good trend trading…