April 2022 – Vant Trading

Becoming an Active Day Trader Vs. Long Term Trader

I want to preface this blog with the fact that I am almost uncomfortable making this post. I don’t really consider the difference between a long-term and short-term trader to be that vast, and not NEARLY as important as what makes a good trader. But people always ask what the difference is and what they should do, so I want to try to make some distinctions between the two.

I want you to take a moment and think about a professional sports team. Let’s look at a professional NFL Team. What do you think would happen if Tom Brady (a quarterback) decided to play on the offensive line? For those who don’t know football, he would be crushed. Tom Brady is one of the best Quarterbacks (if not the best) of all time. However, his skill set does NOT match what would make a good lineman. The players on the line should be BIG and STRONG. Whereas Tom Brady needs to be FAST and ACCURATE. Now I am not saying Tom Brady is not strong, but he had to find the role on the field that best fit his skills and attributes. And while in practice, Tom Brady will not be working on blocking he will be working on throwing.

Yeah, I hear you. You’re saying, “Get to the point.” Well in the same way that a professional athlete needs to play the position that best fits his skillset, a trader needs to find their best fit in the markets. Now I am NOT saying that you need to choose right now whether you want to day trade, swing trade, or invest, but rather it is something you should always be analyzing. Where is it that you succeed? I am not even saying that you MUST choose one role. As they develop, most traders end up having a mixture of strategies in order to become diversified. And if you are a beginner you will not know where your strengths lie. So, you are at a disadvantage compared to the athlete who has grown up his whole life playing in a specific position. But you have an advantage in that it will not be hard to find your place in the market, and you won’t be relegated to a single role. The best part about the markets is that if you can find success as a short-term and a long-term trader, then do both!

So, if you are new, or don’t know where your place in the markets is, what should you do? Well ultimately being a good trader results in you working on yourself more than anything, so you should always be starting within. Work on your patience, your market knowledge, your discipline, get your reps in, and ultimately just start immersing yourself. You will start to see where you tend to look when it comes to trading. But when comparing short-term/day trading and long-term swing trading you tend to see certain characteristics take priority. This is NOT an exhaustive list; it is more our take on some of the traits that tend to make a good short vs. long-term trader.

SHORT TERM TRADING

When I say short-term trading in this instance, I am just referring to day trading. That involves entering and exiting a trade within the same day (sometimes within seconds or minutes). So, as you would imagine, speed can be a day trader’s best friend. Being able to enter and exit quickly and efficiently can be the difference between success and failure. If you are trading fast, volatile stocks then you don’t have the luxury of taking your time in entering your orders.

Time invested is also a big difference when it comes to day trading. You need to be trading much more often. You can’t afford to miss a good day or a good trade. You need to be in early to read the news for the day. You need to find the next hot stock or play. Versus a long-term trader who is more of a sniper and does not need to necessarily get in as early every day.

Organization is also going to play a big part in day trading. And what I mean by organization is being able to track multiple stocks at once. You do NOT want to be following dozens of stocks at once, you will not be able to watch them all, especially starting out. But you want to have alerts set for important levels and be able to manage multiple positions at once as you progress.

Decisiveness can make or break a day-trader. If you are wishy-washy and cannot commit to the decision quickly, you will end up hurting yourself. You need to see a play develop, think about all the possible outcomes, plan for each one, and commit to your trade. Then when that trade develops you need to follow your plan. You cannot create a plan and then divert from that plan as soon as the trade starts moving.

LONG-TERM TRADING

Think of a long-term trader like a sniper. You see your target, you gauge the wind and environmental conditions, you line up your shot and you only pull the trigger when it matches your desired criteria. Disclaimer: I have never actually tried shooting a gun at long range so if I have given a bad metaphor for you actual snipers, I apologize but bear with me.

Therefore, Patience and seeing the bigger picture are important for a long-term trader. You don’t need to necessarily worry about what a stock is doing that minute or hour. You care about where it fits in the daily perspective and where your best entry is. Making sure you maximize how much you are aiming to gain vs. how much you are risking is important. If you are impatient and enter a trade before it develops or before it reaches your optimal entry point, you could turn that winner into a loser. And a long-term trader who tends to have fewer trades does not want to waste a potentially profitable trade. There could be days or weeks where you don’t enter a new trade if it does not suit you.

Having a larger Macro View of the markets also tends to better suit a long-term trader. Your stocks are probably going to be at greater mercy to the movement of the market than the day traders. A stock can have movement and price action independent of the market on a minute-to-minute level. But when it comes to the movement of the stock over weeks and months, if the market, or at the very least the sector the stock competes in, is moving one way, your stock may very well tend to follow. Now it is obviously optimal if you can find a stock that has an order flow that is independent of the market but having a good macro view of things will always help you better understand why a stock may be moving in that direction.

I actually believe that having a decent basic understanding of Fundamentals can benefit a trader. Let me preface this by saying that I am much more of a technical-based trader. I look at the stock charts and patterns and look at price action. However not knowing the fundamentals of a company could hurt you in the long run. I am NOT saying you need to pour through the company’s documents, prospectuses, and income statements. But rather you should understand if the company has been reporting good earnings, what their sales are looking at versus forecasts, and what the fundamentals of the company generally look like. That is because from a Long-Term perspective, fundamentals tend to have a MUCH greater impact than on an intraday level. A company that makes no money and has terrible fundamentals can go up easily in a day, or even a week. But over the long-term, it is going to be hard for that company to sustain growth and higher prices if the company is failing.

Now ultimately if you could learn all these practices and traits, you would become a better trader for it. The best traders I have ever seen out there have strategies that fit from both long-term and short-term perspectives. There will be periods in the market where one set of strategies will do better than others because of the market environment. So, diversifying yourself will only benefit you. But you need to know where your strengths and weaknesses lie as a trader. Finding your place in the market, and strengthening that position before you branch out to others could greatly improve your time in the market.

The Impending Federal Reserve Balance Sheet Reduction

As we approach our first FOMC Meeting of 2022, we are faced with the growing possibility that this may not be the same Federal Reserve that we remember from 2021. How do we know this? Because varying members of the Federal Reserve won’t shut up about it. Now that Jerome Powell has officially received his renomination and finds himself once again at the wheel of the SS Titanic, we suddenly cannot seem to find our market sugar daddy anywhere. Powell has seemingly gone from Market grandmother who hands you a crisp $100 bill whenever you see her, to a shrewd, stingy, curmudgeon that complains that you still owe him $10 from years ago. Over the weeks (and frankly months) we have consistently heard the hawkish members of the Fed squawk about the need for a more aggressive tightening of monetary policy. With the market pricing in the likelihood of 4 rate hikes in 2022 (God help us if true), we have lately started hearing our first rumblings about the reduction of the bloated balance sheet this Federal Reserve has hidden in the back of its’ closet.

Yes, believe it or not, the Federal Reserve Balance Sheet CAN go down in size, though it may drag the market kicking and screaming with it. For those who are scratching their heads at what this is all about, let me first make sure we are all on the same page here in terms of the contents of this Balance Sheet Bonanza.

The Federal Reserve Balance Sheet Assets:

As of March 2021

60% ($5 Trillion) of the $7.69 Trillion in Assets the Fed owned were US Treasuries.
$2 Trillion were in mortgage-backed securities (remember those fun toys?).
The rest was loosely in loans to member banks through repo & discount windows (irrelevant)

The Federal Reserve Balance Sheet Liabilities: DOLLA DOLLA BILLS used to buy those assets

As of March 2021

$2 Trillion in currency notes
$5.3 Trillion in deposits

Ever since Covid crawled its’ way into our hearts and minds the Fed ratcheted up its’ buying of Government Securities and has inflated its’ balance sheet to staggering heights. Below is a nice little representation of the growth in Fed Assets since 2008 (when we tried QE for the first time). This chart comes from https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Did QE even work? That is a whole other question for another time and another bottle of whiskey, though most signs point to a resounding NOPE. But for now, let’s talk about 1. How the Fed can reduce its balance sheet 2. How much should it reduce by? 3. What the impact of this could be.

How can it reduce its’ balance sheet?

There is two main ways the Balance Sheet of the Federal Reserve can shed some pounds. It can allow its’ treasuries and securities to reach maturity and, instead of then reinvesting/rolling over the funds into new securities, keep the cash out of circulation (thus reducing its’ assets and liabilities). Or it can actively sell those securities back into the secondary market. Now each is obviously differing in how aggressive they want to be. To sell those securities back into the market could…complicate things. There is a little thing called supply and demand to worry about and if they flood the market with treasuries, they could cause a nice little explosion in rates. However, some argue that since the yield curve has been flattening, and many of the securities in the Fed’s backpack are long-dated, they should sell their longer maturities to try to raise long-term rates. IF the Fed is going to reduce its balance sheet, we still have no idea HOW they are going to go about it. Maybe we will start to know more on January 26th after the next Fed meeting.

I do want to note that the Federal Reserve HAS tried this maneuver once in the past….and only once. In October 2017 the Fed started a runoff (albeit in a mouse-sized portion) of $10 Billion a month. Over the course of 2018 and 2019, it managed to gradually raise this and managed to lose some weight in the size of $600 Billion; a paltry sum compared to what we need to shed now. At this time markets were…..mixed. Eventually, the Fed had to stop this runoff in the face of mounting market pressures and due to overshooting the drop in Bank Reserve Balances and resume asset purchases.

So, if we end up deciding to lose some dead weight, how much should we lose? Well, the average from what I am seeing (and what Goldman Sachs Analysts seem to agree upon) is a new Equilibrium of $6.4 Trillion in assets (we currently sit at almost $9 Trillion). This would bring us from a whopping 36% of nominal US GDP back to the pre-covid levels of 21%. Now what I have seen from Goldman (and frankly I am not even going to try to attempt to do the mental math and brain gymnastics required to come up with my own number) is that for every 1% of GDP in asset runoff/sales we should experience a 2 Basis Point Rise in the 10-year Treasury Yields. So (and this is about the best math my candlestick-soaked brain can muster) for the 15% of nominal GDP in assets we need to lose, that should move the 10-year about 30 Basis Points. This would have roughly the same impact on rates as 1 rate hike. If you want to see a picture of Goldman’s Public Calculation, I left it below.

Now, who knows what our market’s overlords will decide to come to the FOMC meetings. But I can promise you this, the market is NOT the economy. And it is NOT the rates. The market is a whole other beast, and we may say a temper tantrum from the market as a result. And despite what your magic eight ball might make you think, no one knows where this market will go. This is a year that we expect volatility to spike and risk management to be essential. So we are going to have to play doctor and continually take the market’s temperature to determine how hot-headed our stocks are getting. But don’t expect the market to be thrilled about any Fed action that takes free money from them. The market may attempt to find the new Powell put (the point at which he will turn the money spicket back on). Only time will tell. All I can assure you is that this is going to be a hell of a ride.

Month: April 2022

Day Trader vs. Long Term Trader

Fed Balance Sheet

VANT TRADING, LLC