Author: tyler@vanttrading.com
Day Trader vs. Long Term Trader
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.
Fed Balance Sheet
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.
Forex vs. Stocks
http://blog.epicresearch.sg/2018/06/12/forex-vs-stocks-comparison-singapore-traders-gbpusd-eurusd/
There are many different markets and instruments out there that traders can choose from. It all depends on their trading style and risk tolerance. My goal is to explain the difference between the world’s largest financial market, Forex, and well-established blue-chip companies and the stock market. There are benefits to both depending on what type of trader you are. There are a few main differences that I will be covering such as volatility, leverage, trading hours, commissions, and more.
Anyone new to trading is probably wondering what the heck to choose. There is no better one, it comes down to personal preference and what your trading style is.
The foreign exchange market is the largest market in the world accounting for more than $5 trillion in average trading volume each day. The Forex market largely consists of investment banks, central banks, hedge funds, and large companies. It is also traded 24 hours for 6 days a week. It is traded from Sunday at 5 pm through Friday at 5 pm.
The stock market mostly consists of the large blue-chip companies around the world in which you can buy shares, ownership, of. This is traded 6 and a half hours a day Monday – Friday and is closed on the weekends.
Volatility is very important to a certain type of trader. If you are looking for very volatile short-term price fluctuations then you will most likely want to trade the forex market. Blue chips in the stock market are more conservative and long-term investments.
Leverage is a huge advantage that Forex has over Stocks. A beginning trader with very little capital can enter the Forex market with $100 and get from 50:1-500:1 leverage in order to trade with little restrictions. However, in the stock market, it would be a lot harder to profit from small capital because the leverage is generally 2:1.
Trading hours are considered by many traders as well. The stock exchange is limited to 9:30 am EST to 4:00 pm EST, with the most volatility limiting you to only 9:30 am to 11:00 am and 3:00 pm to 4:00 pm. Unlike Forex, it remains active 24 hours with different markets and time zones such as the US, Tokyo, London, and Sydney. There is typically liquidity at any time of the day in the Forex market, unlike the stock market.
Trading pairs vs companies can be vastly different. In forex, you have to worry about two different companies at the same time because they are traded in pairs and against each other. In stocks when you buy shares of a company you only have to worry about that one company and its health of it, no other company or economy matters. So to be successful in Forex you need to be good at analyzing not only one economy but two at the same time.
Considering the liquidity differences, the price sensitivity makes a difference in trade activity as well. Since the forex market is so liquid and trades trillions of dollars, you can make a trade worth several hundred million and it won’t move the currency price all that much. In stocks, if you make the same trade it could move the stock significantly because it’s the liquidity of the company, not the country’s economy.
Ultimately it’s up to you to decide what suits you better. Most investors know about the stock market more and might want to trade that just because they know what is and are more familiar with it. There are benefits and downfalls to each, it just depends on what you are looking for and feel the most comfortable trading.
How to Journal Your Trades and Why It’s Important
https://tradeproacademy.com/trading-journal/
As I’m sure you are aware, 90% of traders lose. One big activity every trader should take in order to be a part of the 10% is to track and journal every trade you take. Knowledge is power in trading and you must take every loss as a learning experience that is the only way to get better. If you learn to accept losing, our trading career will be a lot smoother.
One website I use and many traders use to journal and track their trades is tradervue. It’s free to create an account. What you will want to do is import the trades you made for the day and then once they are important you can go through each trade and make notes about them. What you did wrong, what you did right, what your levels and thought process was for the whole trade. You will want to note everything so that when you go back to look at it you know exactly why you took that trade and what you could have done better. That will reduce the number of same mistakes you make so that when it comes again you can make money from it instead of losing money. This website also allows you to track your performance based on the inception and see how you progressed as a trader. It’s always fun to see your profit graph go down and as you learn it will slowly start rising up. It will give you some extra confidence and it will allow you to actually see graphically and physically where you stand as a trader and that you are progressing. I recommend also adding a screenshot of the chart so you can see exactly the trade setup you made and it will allow you to recognize the trading layout and visualize what you need to avoid or notice.
It is very important to track your trades because it will give you details beyond what you just see on your statements. It includes your traders’ mistakes and what the market condition was like in that period of time. It also allows you to see what your strategy and thought process was. All of that is important and why the 10% of traders are successful. They analyze their trades and learn from their mistakes and losses so that they don’t make the same ones again and reduce the number of losses. At the end of each week or day go back and see what you did. Notice any common problems or strengths. This will get you in the right mindset and allow you to grow as a trader. It is what will separate you from the 90%.
Penny Stocks vs. Higher Priced Stocks
https://www.thebalance.com/factors-driving-penny-stock-prices-4072794
Why try penny stocks? Are there benefits to trading penny stocks over more reputable and expensive companies? First, what is a penny stock, any stock that trades sub-penny up to $5. These are Typically small-cap companies, meaning companies with a cap under 2 billion. While a 2 billion dollar company might sound great, in terms of the market that is a minnow. These companies are some of the worst possible companies in the market. Most of these companies are doomed to long term but keep in mind 3 of 4 stocks follow the overall market, so know where you are within the market overall.
Why trade these if I just said they are the worst companies in the market, because that’s GREAT? That makes these stocks extremely volatile and Great to TRADE but a Horrible INVESTMENT. Meaning, that if you are a swing trader move on, if you are looking to buy 1,000 shares of a stock at $.05 for $50 and hold it until it goes to $100 and becomes the next apple, move on. You are going to get burned these stocks will go 0 before they go to $1. Although these stocks have a much lower barrier to entry due to low price and can have exponential price movement over mid and large-cap stocks. Berkshire Hathaway will take years before its 6 figure per share price tag moves 20% let alone 100%, although Penny Stocks daily move percentages in the hundreds and thousands of a percent a day. Think about it, after good news what is more likely for Berkshire Hathaway to go from $321k to $642k a share or an inflated penny stock to go from $.10 to $.30 after it has been promoted and pumped up.
As you see there are benefits due to low cost and volatility but if I say not to invest how do you trade these, SCALP. Look for big after-hours movers, as well as stocks pumped up on BS news and momentum trade. Levels can sometimes be hard to find with these stocks and execution especially short can sometimes be difficult due to thin liquidity. The safest way to trade is to momentum scalp the MEAT of The MOVE. DO NOT try and find that tops and bottoms as typically liquidity will be on the decline and you can get stuck in a position. When these stocks have a huge overnight run after being a declining penny stock for months or years odds are it’s on a BS promotion. Look for a breakout of highs or lows with large momentum backed by large volume. As soon as you see price hesitation of volume die, take your money and RUN!
How to Overcome Over-Trading
https://www.simple-stock-trading.com/major-risks-of-day-trading/
Overtrading is one of the main reasons why traders fail, and the thing is the people who overtrade never really realize they are and if they do realize they don’t know how to stop themselves from doing it. The mentality of individuals who overtrade is that they think they need to be in everything and always be trading. That is the only way to be profitable. That couldn’t be further from the truth. Below are a few ways to overcome that problem and get your account under control.
- Overtrading comes from being too emotional and attached. If you start getting anxious and yelling at the computer or making trades that you didn’t plan then walk away. Step back and go for a walk until you have gotten that out of your head. If it doesn’t go away, then stop trading for the day. Not trading is better than being in the red.
- Have a max stop loss for the day. If you don’t have a cap then you could keep trading until you have lost half of your account value. A good number that I use is if I lost 5% for the day then stop because that could grow quickly. Then you start trading because you need to make back what you lost and that leads to revenge trading and it creates a snowball effect of mistakes and losses.
- Don’t trade out of boredom. That will lead to you hunting for signals and plays that you didn’t prepare for which will then lead to overtrading and unnecessary losses. Find your plays for the day before the market even opens and have your levels picked out. That will keep you from overtrading and only trading what you prepared for and expected.
- Lastly, don’t let the fear of missing out get into your head. You will always miss trades and that is inevitable. You won’t catch every trade. But if you let that control you then you will start taking a ton of trades just because what if the move is the best move ever and you miss out on it. Well if it’s not you just got a loss that you shouldn’t have and it leads to more problems. It’s better to miss out on an opportunity you aren’t prepared for than to take the trade without proper research or risk management. That is trading with your emotions which is the biggest reason why traders fail.
If you can learn to control your emotions and stick to your trading plan then you will be able to control your trading and keep it in check. It ultimately comes down to being prepared for the market before it opens. So, block some time out for stock research and write down your levels because that will make the biggest difference whether you overtrade or not.