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Sunday, October 26, 2008

Day-trading vs Holding Overnight

Something interesting based on US statistics on the S&P 500. A bit dated, but useful to think about in local context:


The main conclusion from this study is that "Markets are Nocturnal". In simple terms, this means that most of market returns are from holding overnight, as opposed to day-trading. In fact, just holding overnight alone accounts for MORE than total returns for S&P500 from 1994 to 2008 period, suggesting that intra-day trading is a "losing activity" where S&P500 is concerned.

Over that period, the S&P500 was in a generally rising market.

I have a strong suspicion that the corrollary is also true in a generally declining market, such as the bear market we are witnessing now. My own close observation has shown me without a doubt that holding overnight this year would have been very, very costly.

In summary, in strong bear markets that we've seen since the start of the year, unless you are an accomplished day-trader or contra-trader, better to just step aside and hold 100% cash. That way, you won't lose money from holding overnight, and you won't lose money trading intra-day.

And conversely, when the bear finally turns into bull one day, be prepared to be flexible in changing the trading style from intra-day to long-term investor.

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