Trading Books: ‘Long Term Secrets to Short-Term Trading’ by Larry R. Williams

Long-term and short-term trading differ primarily in the duration of holding positions and the strategies employed:

• Long-Term Trading: This involves holding positions for extended periods, ranging from several months to years. The focus is on capturing larger market trends and benefiting from compounding returns over time. Long-term traders often take smaller positions, allowing for broader diversification and less frequent trading, which reduces stress and effort. This approach is beneficial because mistakes don’t compound as quickly, giving traders time to reflect and adjust .
• Short-Term Trading: This includes strategies like day trading or swing trading, where positions are held for a few minutes to several days. Short-term traders aim to capitalize on small price movements and often use technical analysis to make quick decisions. However, this can lead to “death by a thousand cuts,” as frequent trading increases the risk of compounding mistakes and can result in significant drawdowns if not managed carefully .

Both approaches have their merits, but the choice between them depends on your personal goals, risk tolerance, and the amount of time you can dedicate to trading.

Choosing between long and short trading depends on your goals, risk tolerance, and market conditions. Here’s a breakdown:

• Long Trading: This involves buying stocks with the expectation that their value will increase over time. It’s generally considered less risky because the potential for growth is unlimited, while the maximum loss is limited to the initial investment. Long-term trading allows for smaller positions, broader diversification, and less stress, as mistakes don’t compound quickly .
• Short Trading: This involves selling stocks you don’t own, hoping to buy them back at a lower price. While it can be profitable in declining markets, it’s riskier due to the asymmetrical risk-return profile. The potential loss is unlimited if the stock price rises significantly, so it requires careful risk management and a robust short-selling system .

For most traders, especially those starting out, long trading might be more suitable due to its lower risk and stress levels. However, incorporating both long and short strategies can provide diversification and potential profit in various market conditions.

Traders often rely on systematic approaches to determine when to buy and sell stocks. Here’s how it typically works:

• Set of Rules: Successful traders use a set of predefined rules that dictate when to enter and exit trades. This helps eliminate emotional decision-making and ensures consistency .
• Backtesting: Before applying these rules in real markets, traders backtest them on historical data to ensure they are profitable over a long period. This process helps build confidence in the system and ensures it can withstand various market conditions .
• Indicators and Signals: Traders often use technical indicators like the Relative Strength Index (RSI) or moving averages to generate buy and sell signals. For example, a trader might buy when the RSI indicates a stock is oversold and sell when it’s overbought .
• Market Conditions: Systems can include rules that adapt to different market conditions. For instance, a trend-following system might only be active in a bull market, while a mean reversion system might perform better in volatile conditions .

By following these systematic approaches, traders can make informed decisions about when to buy and sell, reducing the influence of emotions and increasing the likelihood of consistent success. 

You can technically hold a short position indefinitely, but several factors might force you to cover it sooner:

• Exit Signals: If you’re using a systematic approach, your trading system will provide signals for when to exit a short position. This could be due to hitting a profit target or a stop loss .
• Stock Recall: When you short a stock, you’re borrowing it from your broker. If the original owner wants their shares back and the broker can’t find another source, you might be forced to cover your position .
• Margin Calls: If the stock price moves significantly against you, you might receive a margin call, requiring you to either add more funds to your account or close the position to reduce risk .
• Risk Management: Holding a short position too long can be risky, especially if the stock price starts to rise. It’s crucial to have a stop loss in place to prevent unlimited losses .

In practice, it’s essential to manage your short positions actively and be prepared to exit when necessary to protect your capital. 

Generally speaking, long-term trading tends to be more profitable for individual traders. Here’s why:

• Edge in the Market: Long-term trading allows you to capture big trends and significant market moves, which can be more profitable over time. It provides a quantifiable edge that is often eroded in short-term trading due to high competition and trading costs .
• Lower Competition: There’s less competition in the long-term trading space compared to short-term trading, where hedge funds and high-frequency traders dominate. This makes it easier for individual traders to find profitable opportunities .
• Reduced Stress and Mistakes: Long-term trading involves less frequent trades, which means mistakes don’t compound as quickly. This reduces stress and allows for more thoughtful decision-making .
• Higher Success Rate: Traders using long-term strategies have a higher success rate compared to short-term traders. The success rate for long-term traders is about 20%, which is significantly higher than for short-term traders .

While short-term trading can be profitable, it requires a high level of skill, discipline, and the ability to manage stress effectively. For most traders, focusing on long-term strategies is a more sustainable path to profitability.