Short-Term Trading2

Short-Term Trading2 - Fundamentals of Short-Term Trading Part Two Brett N Steenbarger Ph.D www.brettsteenbarger.com Note This was written as the

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Fundamentals of Short-Term Trading: Part Two Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com Note: This was written 1/31/04 as the second in a series of articles that describe my evolving approach to short-term trading. I strongly recommend reading the article on stationarity, which is archived on the site, before reading this series of articles. The first article in this series looked at intraday patterns of volume and implications for trading. A major conclusion was that the distribution of price changes through the day is nonstationary, making it hazardous to employ the same buying and selling parameters through the day. By analyzing markets horizontally as well as vertically—comparing action at one time of day to action at the same time during previous days—we can generally gauge whether or not a particular movement is significant. How one employs this information will depend upon his or her time frame of trading, which in turn reflects one’s risk tolerance, which is closely related to personality traits. Longer holding periods yield more variable results—including drawdowns. Adjusting the mix of holding period and position size is essential in ensuring that one is taking a level of risk that will produce adequate rewards, but that will not court ruin during a losing streak. The management of risk is an oft-neglected facet of trading psychology. Risk, Size, and Holding Period Let us say, for instance, that we are going to risk 2% of our trading capital on a trade. If we are trading tick-by-tick, we could trade dozens of contracts and still remain risk- prudent. If, however, we are holding positions overnight, where the odds of a multipoint move are now greatly increased, the same 2% parameter would yield a position size of only a few contracts. Even on an intraday basis, a scalping trade placed early in morning has a greater risk of a multi-tick adverse move than the same trade placed nearer to
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This note was uploaded on 10/21/2010 for the course BUSINESS 19450 taught by Professor Goldberg during the Fall '10 term at Saddleback.

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Short-Term Trading2 - Fundamentals of Short-Term Trading Part Two Brett N Steenbarger Ph.D www.brettsteenbarger.com Note This was written as the

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