Choosing Your Trading Approach

When deciding whether to trade with a bias towards long or short term investing, one of the core considerations has to be the trading frequency that each approach tends to facilitate. On the one hand, short term trading tends more often to rely on numerous small individual transactions to deliver a profit, while longer-term positions are afforded the luxury of having to call the markets correctly on a limited number of occasions. But the problem is complicated in at least one other salient dimension: risk.

The risks of trading with a low frequency are heightened in the sense that one wayward trade will have a proportionately greater negative affect on the overall trading portfolio. However, the diversified risks of high frequency trading comes at the price of increased trading commissions and broker fees, so it’s something of a balancing act to determine which trading approach you find most suitable. Whether you’re thinking of placing 5 or 50 trades, let’s take a look at the key factors for consideration when choosing the style of your trading approach.

Low Trading Frequency

The idea of trading small and often has a logical, step-by-step appeal for many new traders looking to get involved in dealing futures. Yet despite this attractive appearance, it is extremely common for traders to switch to a more long-term approach over time as they become more experienced and more familiar with the dynamics of futures trading. That’s not to say that high volume trading is a bad thing, and as we’ll see in a moment it has several key advantages over other forms of trading, but the benefits of low frequency trading for those in a position to overcome the heightened risk profile make it oftentimes the trading style of choice.

The first advantage of a low trading frequency is that by placing fewer trades, you are required to input less research effort. Essentially, trading fewer positions allows you to be more thorough in your research, enabling more in-depth research and analysis time compared to the more cut-and-thrust, fast-paced world of constantly trading positions. From a practical point of view this means you need spend less time chained to the computer monitoring your positions and researching fresh ones while you can spend more time researching the best positions for the maximum return. Less work for more money, providing everything goes to plan.

A low trading frequency also saves on the costs of trading, such as commissions and brokerage fees. More trades leads to higher fees when aggregated, and this directly hampers your bottom line. While many traders ignore or don’t notice the impact of broker fees on their take-home profits, those switching from a high to low trading frequency will notice a stark drop in the percentage of their revenue that’s siphoned off into the broker’s back pocket.

High Trading Frequency

Believe it or not, calling the markets correctly on that one-off jackpot trade isn’t easy. Stressing the difficulties of getting it spot on is in itself tricky without personal exposure – even the most well researched, most logical positions thought out by the world’s leading traders can go wrong. For that reason, the eggs-in-one-basket approach of traders with a lower frequency strategy often poses a higher risk loss and ultimately failure, and it is recommended that new traders especially start off with a more short-term outlook to minimise risk. By spreading your trading capital across numerous positions, one or two failures need not be the be all and end all, and the chances are higher that you will secure several winning trades.

High frequency trading is also helpful insofar as it enables you to trade on the strength of more vague trading research. While it is never helpful to ignore the trader’s obligation to research, a quick glance at the trend of price movements over the course of the trading day can be enough to point towards a transaction capable of delivering a couple of PIPs in movement, which is all that’s necessary to capitalise from a single trade when using a high frequency trading strategy, and as a result the individual research burden is a lot lesser, and easier for beginners to comprehend in spite of the increased workload.

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