Greater rewards worth waiting for

Why do I talk about day trading so much, when there’s supposedly better money to be made from longer term investments?

Well, I might as well ask my kids: Why do you watch telly when you could look out of the window and watch the dramatic changing of the seasons?

Day trading is exciting … it’s dynamic … and something is always happening that we can talk about.

I love day trading the markets. And I’m not about to give it up.

But that doesn’t mean that, meanwhile, long-term investments can’t be quietly filling my trading account behind the scenes.

Traders may not talk about it so much – but the successful ones are all at it!

Which is why, in 2013, I’m going to be looking at successful longer term trading strategies. These may not set your heart racing – but they should make your bank manager very happy indeed.

Traders on longer timeframes make more money

In a study of 60,000 traders run by the University of California, the 20% who traded most actively, underperformed the 20% who traded least actively by 5–10% per year.

Traditionally, most of the money is made from the markets by carefully positioning for a big move, and then letting that move unfold and develop over weeks, months or even years.

Why is this the most profitable way to trade?

There are a number of reasons …

– You are taking advantage of bigger moves.
– You reduce your commissions by trading less.
– You reduce the impact of slippage by trading less.
– You trade less, so make fewer mistakes.
– You don’t feel rushed by the speed that the market is moving.

As Warren Buffet put it: “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”

The sweetness of delayed gratification

I’ve recently picked up a book called Wait: The Art and Science of Delay. I was drawn to the book because, since childhood, I’ve been a prize-winning procrastinator (plus, it has an picture on the cover of a dog balancing a biscuit on its nose – how can anyone resist that!)

The author Frank Partnoy talks about a discovery he made talking to former senior executives at Lehman Brothers.

“Lehman Brothers had arranged for a decision-making class in the fall of 2005 for its senior executives. It brought four dozen executives to the Palace Hotel on Madison Avenue and brought in leading decision researchers, including … Malcolm Gladwell, who had just published Blink, a book that speaks to the benefits of making instantaneous decisions and that Gladwell sums up as ‘a book about those first two seconds.’ Lehman’s president Joe Gregory embraced this notion of going with your gut and deciding quickly, and he passed copies of Blink out on the trading floor.

“The executives took this class and then hurriedly marched back to their headquarters and proceeded to make the worst snap decisions in the history of financial markets.”

What Partnoy tells us is that the best decision makers use the maximum time available to make those decisions. That allows them to accumulate the maximum amount of information, and to effectively weigh up that information.

Even a top tennis player, who seems to be acting at lightening speeds, is maximising the milliseconds he or she has available to decide how to play a ball coming towards them. During super-fast reactions, the best-performing experts in sport, and in life, know when to pause, if only for a fraction of a second.

When faced with a decision, there are two questions we should ask ourselves: the first is how long do we have to make this decision; the second is how should we best spend our time leading up to the moment of decision.

If we’re day trading, the answer to the first question may be a few seconds or a few minutes.

In longer-term investments, we’re giving ourselves more time to make decisions.

And there’s every reason to think that those decisions will be better.

But for now, I’m off to make a cup of coffee … gaze into the middle distance for a while … check out that clip on Youtube of a man talking to turkeys …

… I really think I’m getting the hang of this procrastination thing …

Related posts:

How other people got rich, while you were waiting for the perfect moment Causing harm & reaping rewards