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The following theories should apply no matter how one defines short or long
term. The shorter the term the more the short term ramifications will
apply; the longer the term the more the long term ramifications will apply.
The costs of trading, commissions, fees, and slippage, are the 'house edge'
built in against the trader. A totally random system would break even
without these costs. As these cost increase as a % of total or original
equity, the greater the edge the trading system or methodology must have
over random entry and exit to show a profit. This is the disadvantage of a
short term system. Since it takes more trades and costs are fixed per
trade, the net costs at the end of the year will be a greater % of the
original investment or equity. Even more importantly, the smaller moves
will be more negatively impacted by the costs. i.e. A 5 cent move in the
grains with $50 in costs will have surrendered 20% of its profits. In fact
every system/methodology has a point at which costs render it useless.
This point can be reached through rising costs ($1000 rt. comm.) or
diminishing time frame. This extreme example illustrates my point. If I
had a grain system that had 80% winners and a W/L ratio of 3-1 but, my time
frame was so short that the winners were only 1 1/2 cents, my cost
breakeven point would be $50. The advantage of a short term system is tied
in with the power of compounding. If one has X% edge per trade over the
market in two different systems, the shorter term system is going to be
vastly superior for two reasons. Firstly, it will be able to use the edge
more often. Secondly, and most importantly, it will get to compound its
returns more quickly. If system A has 25 trades a year and system B has 25
trades a week, system B will compound 52 years of trading A in one year,
even though they have the same profit expectancy. Two other advantages of
short term are the time component of a drawdown will be less, and more
trades leads to results closer to expectations.
The advantages and disadvantages of long term trading are the opposite of
the above.
While the ideal trading methodology/system would be short term in nature,
reality is that many short term systems are rendered useless by slippage,
and a market edge is very difficult to obtain. The less of an edge one
needs the better. This is why I believe long term systems are superior.
By trading longer term one decreases the cost as a % of equity and as a %
of the gross avg. trade. By paying fewer costs one's entry exit strategies
have a smaller hurdle to clear to get into the black. I do think one can
be too extreme towards long term as well. To try to generate more trades,
I think it is advisable to trade multiple markets with multiple systems and
multiple time frames slanted towards longer term. This will also help
flatten out the equity curve and avoid steep drawdowns.
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