Bob:
<Holding positions overnight...>
WOW, that was quite a post. Twenty questions, I believe. I'll try to do my best to respond to them.
First, let me repeat that I do not personally hold positions overnight. However, I know that some "daytraders" believe that a stock that shows strong movement during the day (+3-5 pts??) will likely continue its momentum during the first 30 minutes of trading on the open.
I am a very firm believer that you must develop a trading plan AND follow it. I have not tested the expected returns of next-day follow-through on this type trade. However, I would certainly test any overnight holding methods before taking this added risk.
Backtesting provides two key measures for a system: Expected average gain, and risk (largest loss, largest drawdown, standard deviation of returns, etc.). I rate my systems based on the best Sharpe Ratio (Average gain / standard deviation of trades). I also like to do my backtesting using at least 30 days of data and 200+ trades to increase the chance that the backtested results will match future results.
So to summarize my thoughts... Do not take any uninformed risks. ==> This can be daytrading, position trading, overnight holding or anything else. It is senseless to put hard earned money on the line until you are confident that your system gives you an edge in the market. Otherwise, you are merely gambling and doomed to failure (==> unless you trade within the limits of your entertainment budget, in which case, trading and gambling are okay).
To become informed of the risk of any proposed trading strategy: Backtest it, or in the alternative, paper trade with it. Both of these methods will give you a rough idea for the expected returns/losses and risks associated with your new-found system. One additional thought: Be very conservative in your testing to account for the realistic likelihood of your order being executed, commission/fees, etc.
Hope this helps,
-Eric |
