When people talk about different styles of trading, like day trading,
position, swing, trend, etc., are they really talking about someone's
style of trading, or how efficiently they are trading? Underneath what
is usually being stated is how "involved" they wish to be with their
investment. Really though, the only legitimate way of looking at it is
with respect to efficiency. No matter which "style" you may choose, if
you want to be a shrewd, successful investor, you must monitor your
positions at least once per day.
While there is money to be made in day trading, I do not consider it to
be efficient. You must monitor your positions constantly all day while
the market is open. The efficiency of your job, in this case trading,
can be simply stated mathematically with the formula; profit or wages /
time worked. So if your profit remains constant, but you could choose
to work only two hours per day or eight hours per day, which scenario
would seem more efficient to you? Obviously, the two hour day. I would
much rather work an hour or two in the morning, and have the rest of
the day to myself than be glued to my computer screen all day long.
So that leaves us with multiple day trades. Now since we are concerned
with efficiency, we want to trade in such a way as to obtain the
highest possible profit in the least possible time frame. Charts 1 and
2 below show typical up trends. Now many would be happy to get in on
the start of the trend in chart 1 and ride it out to the top (between
the red lines). But there is a more efficient (ie, more profitable) way
to trade it. You will note that during this trend there are many
valleys on the way up. This is normal. But ask yourself, "What profit
am I making during the time one of those valleys are occurring?"
ANSWER: None. In some cases negative. Wouldn't it make much more
since to ride up the "swing" in chart 1, exit and while a valley is
occurring on one chart (at the blue line), ride the "swing" on chart 2
during the same time period (between the blue lines)? Now look at the
difference for the same time period by jumping from one swing to
another. Instead of having an up and down (or stagnate) period, you
have two contiguous up periods! This is the effeciency behind swing
trading. Although you still need to know how and when to enter a swing.
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