One of the best things about helping people learn how to short-term trade is hearing all about the war stories of how they’ve gotten to where they are now.
It’s important because it lets me get inside of their brains and see where the biggest vulnerabilities exist.
How to Short-Term Trade: The Timing Can Throw You Off
The most common problem I notice is when people adjust their time frame.
What I mean by that is switching from trading long term to short term, or vice versa.
The reason why I bring this issue up is because I’ve seen some short-term traders change to day trading, and they just couldn’t make it work. I’ve also seen the opposite, where professional day traders weren’t the best at holding positions overnight or longer.
But there’s another reason why I wanted to bring this topic up…
On Monday, March 28, the yield on the five-year Treasury rose to 2.6361% while the 30-year yield fell to 2.6004% — this is the first time they’ve inverted since 2006, before the Great Recession.
In the past, these kinds of distortions in the bond market have often occurred before black swan events like U.S. recessions… So it’s important that we keep a close eye on this and start to consider short-term trading as an option to protect our portfolios from even heavier volatility.
But back to what I was explaining before… Professional day traders weren’t the best at holding positions overnight because they needed to adjust their risk vs. reward thinking to match the new time frame.
For example, someone going from holding trades overnight to day trading needs to mentally adapt to positions producing smaller gains than they might have seen before making the switch.
This might sound simple but in reality, it’s a difficult adjustment for people who’ve been using the same strategy and time frame for a long time…
A day trader who’s comfortable exiting a losing trade before the closing bell might be paralyzed, for lack of a better term, by the uncertainty that goes along with learning how to short-term trade.
The new stimuli caused by fear and uncertainty isn’t something the trader has experienced before, and that can cause a negative effect on future performance.
How to Short-Term Trade: Even Pros Have Problems Adjusting
I’ve worked with several floor traders in the past who were successful for over 25 years in the pit, but then decided to learn how to overnight or short-term trade.
Most of them had trouble switching time frames because they weren’t comfortable with that feeling of uncertainty when doing something new. I mean, some couldn’t even sleep as a result of the fear.
Although each and every one of them had tremendous experience, the idea of holding positions overnight created vulnerabilities…
As a result, it had a negative impact on their performance.
While there’s no magic bullet to adjusting to a time frame change, there are several things you can do to make learning how to short-term trade as gentle as possible for your mind…
If you follow the steps in this article, you should have a much easier time adapting to a different time frame… regardless if you’re going from overnight to intraday, or vice versa.
How to Short-Term Trade: Use the Same or Similar Strategy
The first thing you need to do when learning how to short-term trade is keep your trading style as similar as possible.
If you’re familiar and comfortable trading reversal strategies, you should continue to do so when you change to a different time frame.
The last thing you want to do when you adjust your time frame is to also change your trading style.
Many traders who transition from overnight to day trading feel an added sense of security because they’re not exposed to overnight risk. As a result, some people feel they can experiment with a different trading style and change from doing what they’re used to day in and day out.
But being unfamiliar with a new trading style is going to cause headaches… and losses.
And when they enter a losing period, they quickly abandon the new trading style and revert back to what they’re most familiar with.
So no matter how adventurous you feel, don’t make any changes to your trading style just because you moved the time frame.
This will only cause frustration and result in negative feelings about the change in time frame, and possibly trading in general.
The last thing we want to do when learning how to short-term trade is mess with our mind’s belief system.
Test the New Time Frame Strategy
The second most important thing to remember before you adjust your time frame is to make sure your trading strategy is adaptable.
There’s nothing worse than getting comfortable with a strategy that took a long time to develop… only to find out it doesn’t work as well in the new time frame.
The strategy should first be paper traded using the new time frame for at least one month before using it in real time with real money.
This lets you adjust your mind to how the strategy performs, allowing you to get a good feel for the different risk and reward characteristics it produces based on the changes you’ve made.
Keep in mind, a change in time will also change the size of both winners and losers…
But some characteristics, such as the ratio of average winners to losers, should remain stable if the strategy is truly adaptable.
Make sure to document the strategy’s performance so you can see exactly how the strategy performs in the new time frame. This will give you the added confidence to trade in real time, especially if you hit a draw down or losing period when you start learning how to short-term trade with real money.
Avoid Large Position Sizes
The third and final consideration when learning how to short-term trade and adjust your time frame is the size of your position.
Seasoned traders often forget that trading a new time frame is a different psychological experience…
So they often trade the same position sizes they’re used to before changing. This isn’t a good thing to do because the mind treats the new time frame as a new experience regardless of your previous trading chops.
This will create an additional stress trigger for the mind to adjust to in addition to the stress caused by the new time frame adjustment.
The best way to deal with this issue is to start slow by trading a small fraction of your typical position size (after you’ve paper traded for a month).
This way, your nervous system won’t get overloaded by dealing with two separate stress triggers… And then increase your position size over time once you’re comfortable with all of the adjustments.
Make Sure to Avoid Severe Stress
I once worked with a professional equity trader who traded 5,000 shares at a time on average.
His average holding time was about one week or so, which means he only focused on opening-range breakouts and not much else.
He did the same thing for 20 years and it worked great for him.
But then he decided that he wanted to learn how to day trade, and he started losing $20,000 to $30,000 each trading day.
After working with him for a few days, I noticed the opening-range breakout method that worked so well overnight wasn’t an effective day strategy because the stocks he was picking didn’t have enough of a daily trading range.
In other words, they weren’t volatile enough to make the strategy profitable.
The trader didn’t want to adjust to a new strategy, so I worked with him for a few days and adopted his strategy to the E-mini Nasdaq market.
This offered him the additional volatility and trading range needed to make the opening-range breakout strategy effective again. So the trader’s performance was back on track within a few short weeks.
Can Negativity Affect Performance?
Another memorable experience I had with time frame transition issues is when a professional E-mini day trader asked for my help making an adjustment to trading exchange-traded funds (ETFs).
The trader would hold 50 to 100 E-mini contracts at a time, and he worked with me before when making the jump from the pit to off the floor.
The transition wasn’t a big one… He rented an office above the pit at the Chicago Mercantile Exchange building, but nonetheless was trading successfully off the floor for the first time in his life…
And he was not using a monitor to gauge market action as opposed to being part of the action inside the pit.
Just imagine working as a trader for 30 years and never getting quotes from a monitor…
But now, with the quote screen, he had the ability to keep track of multiple markets, and he soon expanded into stocks and ETFs.
When I was called to come in the second time, I found out the trader who never held positions overnight (and who only started trading ETFs less than a few months before) was putting on 10,000-share positions at a time.
Because ETFs move slow compared to the E-minis, he said it felt like going from driving 100 miles per hour to 10… The equity markets were moving in such slow motion that he felt comfortable putting on massive positions.
But when the day’s session was over and the markets closed, he would develop unbearable anxiety because he felt he’d lost control and could not liquidate his position till the next morning.
This was a feeling his nervous system was unfamiliar with, so the stress of learning how to short-term trade was unbearable.
Start Slow and Build up Confidence
I advised this trader to liquidate his ETF position right away until he got his bearings back and was again comfortable trading E-minis during the day.
When he regained his confidence, I had him start at 100 shares for the first month… Then increase the position size to 200 shares, and then 100 more shares each month till he built up to his desired size.
After six months, he called me and said that once he got over the 1,000-share mark, he lost all fear and anxiety and was able to reach his desired trade size.
Everyone Needs an Adjustment Period
The main point of this article is that changing your time frame can have negative consequences even if you’re a seasoned pro with years of experience.
So imagine what changing a time frame could do to someone who’s just starting out or learning how to short-term trade with their first strategy.
Many traders don’t realize that changing the time frame is like driving with your steering wheel on the right side of your car for the first time.
If you’ve been to Europe, then you know what I mean…
No matter how great of a driver you are, it still feels different and takes time to get used to…
If you’d like to learn more about short-term trading, check out these other posts: The Best Short-Term Trading Strategy for Beginners and Don’t Make Simple Trading Strategies Complicated.
And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to!
All the best,
Senior Strategist, WealthPress