Actively Trade or Passively Trade ? Profit=f{Skill, Opportunity,Mentality,Environment}

The question I get asked a lot when speaking or working with new traders is how active should I be as a trader? This question has been asked a lot by many around the globe, if you ask your broker he will say active, your trend adviser he will say less active. So who is right ? Several years algo I ran a group of 50+ ALGO day traders using our ATS trading software and where the opportunity to trade a lot was always there because our short term ALGOs gave 20+ plus trades per day. Looking back on it however, did we need to do that much trading (we routinely did 1% of total SPY volume 1-2mm shares per day).  My answer is – it depends on the person/trader.

Many years ago, I used to define profit potential as a function. Profit was defined as a function of skill and opportunity. The less skill you have means you require more opportunity. This is the scalper. The more skill you have, then the less opportunity you require, this is the longer term position trader. I have since amended that function to include mentality even for ALGO trading because ALGO need to be run, they don’t run themselves, and environment, which is defined by how much time a trade can or does spent connected to the trading.

Why is mentality important ? Simply put, some traders cant sit on their hands. They need to be involved in some action. This is as much about emotion as it is about market view. Other traders don’t want to watch the market short term and prefer to place their trades with their levels or what ever form of money management and then things unfold. The environment aspect is relatively straight forward. Many traders d not trade full time and work at other jobs. This means that they cannot be monitoring short term algos all day or they soon wont be working full time.

Below I have posted three of our ALGO programs from the Index Strategist. All three produces similar $2000 returns but did so in very different ways. The first chart shows a relatively active model that we use in the live trade. This model relies on shorter trades for better risk adjusted returns but has a fair amount of trading during the month. For the ADHD trade (like me) this is preferred but this is for full time traders who have the time to make sure things are running smoothly.

The second chart is a lightly less active model that requires more patience but is better suited to the trader who is watching many markets, perhaps have many ideas. This model has only one on and off session the whole month. This is more idea for the trader who has some patience and is not in front of their screen all the time. This level requires more faith in the process of the ALGO which is generated form understanding how the ALGO is designed.

The Last example is a very passive approach that is employed by the trader who has much more skill (or AGLO signal being right) but also places a great deal of value in letting the trade work because they just don’t have the time to monitor short term.

Bottom line is that every trader is different and each approach should factor in many inputs to select the best way to trade.