Time Travel Day Trading – Shortening your trading horizon

Published on: March 29, 2022

Few traders consider the impact of trading horizon on the amount of elapsed time it’ll take them to get to profit. 

A time travel machine would be very useful in day trading. Especially if we could peek ahead at tomorrow’s markets.  Of course, that’s not possible. What’s also not possible is becoming a long-term trader in a short amount of time.  Yet, that’s exactly what a lot of traders are trying to do.

Long-term investors have the longest trading horizon. If you are holding positions for a year or so, then it makes sense that you can’t “get profitable” in a couple of weeks. You’d not have closed a position in that time. In fact, it’d be fair to say you’d need years of experience to get to a position where you were consistently profitable because that’s how long it would take for you to experience closing enough trades to know what works and what doesn’t.

Day traders have the shortest trading horizon, but it’s here where many new traders fail to consider the nuances of different styles of day trading. Many traders choose a style of day trading without considering what would be a realistic duration to get to profit. For example, it’s popular now to encourage traders to do “homework” before a trading session. This usually involves looking at some combination of historical charts, volume profiles, market profiles and then creating ‘scenarios’ of where the market may go and how to trade it.

This sounds very organized, very efficient, very well-thought-out. It’s also going to keep you from being consistently profitable for 12 months.

Huh?

The problem with the ‘homework’ approach is that it puts you on a higher trading horizon. Your performance as a trader is directly linked to your ability to do good homework. To come up with tradable scenarios each day. Every day, you just get one chance to do homework. One chance to review how you did and one chance to get feedback from the market on your homework skills. There is after all only one day per day. This is compounded by the fact that to get good at this sort of analysis, you need to experience different market conditions. You’ll need to experience summer time and winter time markets. You’ll need to experience the extremes of ranges, the middle of ranges, trending markets too. A year contains somewhere around 240 trading days. That’s not a lot but should be sufficient to see you making some decent calls.

Let’s call it a round year. That ‘homework’ approach has basically stretched your trading horizon, but the fact that most traders want to buy the low of the day and sell the high of the day effectively stretches the trading horizon too. It sounds like the right thing to do, it sounds disciplined – and it is, but it’s a long road. 

So, what’s the alternative? Proprietary trading firms take interns that have never traded before and turn them into traders. Their approach is to start on the smallest trading horizon possible, which means scalping. Now, I do understand that new traders want to be making 100 tick trades on Crude and 40 tick trades on the S&P500 right from the start. That’s just not realistic. If it was, prop firms would start their interns doing it. The benefits of scalping for a new trader are:

• Many trade scenarios per day, as opposed to 1 or 2 ‘homework’ based scenarios.
• Experience of many more trades in any given period of time. 
• More time in trade, more experience managing trades, more experience becoming mentally attuned to being in and cutting trades.

In other words, scalping gives you more experience trading over the same period of time. If your trading technique gives you 50 signals a day, then you’ll gain more trading experience than a technique that gives you 1 or 2 signals per day.

Prop traders start off short term, but at the same time they hone their longer-term analysis skills. So you can still do your homework, but only as part of a longer-term skills building process. Scalpers could be long one minute and short the next, so homework isn’t going to help, it’s all about trading the “right here, right now”

It makes sense that prop firms push interns towards a shorter term trading horizon, but most retail traders avoid it. Partly they don’t know any better, partly they are trying to swing for the fences instead of chipping away at the market, taking small but consistent profits.