Inactive Intraday Trading

In the book, Trading in the Footsteps of Sherlock Holmes: Balancing Probabilities for Successful Investing, Dr. Anthony Trongone defines Inactive Intraday Trading as some one who is not actively following the market but trades when it works best according to the system or fits within one’s specified trading schedule.

When I tell people that I am a full time trader, most of them assume that I am a guy who is stuck to the monitor for the duration of the market as I try to decipher the dark secrets of the market and pull wool over my competitors (other traders who take the position opposite to mine). Of course, that is far from the truth as I spend more time away from the monitor than in front of it.

Even though I do trade on the Intra-day time frame, my average holding period for a trade is around 5 days and that means that more often that not, I have not much to do other than twiddling my thumbs so as to speak. And then again, since at the current juncture I do not trade shorts (most trend following systems haven’t rewarded shorts for a long time now), the holding becomes even longer.

For instance, I got out of my long on Monday & have not placed a trade till date. The thought that immediately pops up will be, WTF! aren’t there a lot of other opportunities present in the market and would not it make sense to try and maximize the capital that is otherwise being left underutilized?

In most business, more the time you spend, greater the possibility of a higher income. If a Taxi driver decides to drive for 12 hours instead of 8, he has a very high probability that his Income will be higher (even after accounting for the Expenses). The same applies to a whole lot of other business / professions as well.

But when it comes to trading, more time or more trades does not have to mean a better result. Trading is asymmetric by nature which means that some one who places just a single trade may actually be able to beat you even though you are trading ten trades every hour.

Markets provide opportunities for a trader every day, every hour, every second. But be as it may, the fact remains that we can identify, execute and capture only a very small number of such opportunities. Only in hindsight do we realize whether we were truly successful or not.

But there is also the bigger issue of position sizing. If you put in a large number of trades, the risk per trade needs to be pretty low. But if you were to risk a small amount of capital, the rewards too will be small when measured against the total capital available.

On the other hand, if you were to start risking bigger chunks of capital, you could either start blowing up through you account way faster than what is sustainable or end up moving the markets every time you take a trade since the quantity you trade is higher than the liquidity that is present in the market. Either of them is dangerous to the health of your capital and since the impact of losses are much higher than the happiness of wins, the damage to the traders health can be pretty dastardly.

Since 1st January 1996 till date, CNX Nifty has moved up by 7211 points over a period of 4929 days giving us a average gain of 1.46 points per day. But if you were to have a crystal ball which could predict before close of today the closing price of tomorrow, you could have gained those 7211 points by being in the market for just 32 days (0.65%). Yes, just 32 days of rise accounts for the total gains made by Nifty over the last 19 years.

My point in providing the above static is not to say that one needs to search for a Crystal Ball (Holy Grail) that can identify such days. Rather, my thought out here is that the above numbers showcases the fact that with the right tools and strategies, no investor / trader needs to be distraught at missing small opportunities. On the other hand, its important that not only we have a system that can be rightly positioned when the big moves happen (here is a clue: most big moves have happened in line with the trend that was in effect) and more importantly we have the know how and ability to bet big.

Trading can be a enjoyable and profitable venture. Do not make it into something that eats into your life day in and day out. No amount of money / profits that you earn by taking that kind of stress can ever repair long term damage to the health and psychology that occurs due to such continuous strain.