Trading is now more than ever being recognised as a solution to getting financial security, freedom and even huge wealth eventually without having a job working for someone else that keeps you ‘just over broke’ and that could make you redundant at any time.
But you may be asking yourself what’s the easiest and most profitable route to wealth from trading even starting with a very small trading account?
Well firstly the good news is the fact that the most profitable way to trade is arguably actually the easiest way.
We’ll be looking at the risk versus reward ratios of day trading compared to the risk versus reward ratios of longer term trend following and importanly the success rates of these approaches will also be considered.
The purpose of this article is to reveal which trading approach generally produces better returns overall; day trading or longer term trend following. Firstly, let’s address day trading.
Typically day trading chart setups might offer a $1 risk to a $3 reward and the success rate of all these trades might be around 70% for a good trader with a very good system.
On the other hand a good trend following system can offer a $1 risk to over $15 reward when you catch good trends and the success rate of these trades is likely to be about 40% with a proven system.
So which is better?
As you’ve probably worked out already the trend following system comes out on top over day trading after just a few trades. Let’s do the basic mathematics to prove it over ten day trades and ten trend following trades.
These trades mentioned here are ’round turns’ meaning one trade mentioned actually means an opening trade then a closing trade, for example a buy then a sell of a security counts as one trade. This is very simple.
So with daytrading first; seven trades make $3 each and three trades lose $1 each which equals a profit after ten trades of $18. So the sum is (7 * $3) minus (3 * $1) which equals an $18 profit.
Now let’s look at the trend following figures. Four trades make $15 each and the remaining six trades lose $1 each which gives a total profit after ten trades of $54. So the sum is (4 * $15) minus (6 * $1) which gives a total profit of $54.
However, the key principle here with trend following especially and which you’ve probably heard many times before is to let your winners run, always cut your losers quickly and all according to your proven trend following system. So is ‘a profit a profit’ really?
Well if you don’t let your profitable trades run, your losers aren’t offset as much obviously so relax and enjoy the ride your winners give you when trend following. Doing less is definitely more in this game.
To summarise, trend following generally produces better returns overall than day trading and for many traders trend following is a better choice not just because of its generally higher profitability but because it’s easier, far less stressful and demanding.