Short-term here means holding up to at most 1 week. Does trend-trading work under such short time horizon? Or should one better stick to mean-reversion techniques for short-term time frame?
For short term trading it is better to trade the mean-reversion approach than trend following. Most of the ET traders here are mean-reversion traders, the approach they trade are using long term trend as the guidance to long or short, and then trade in that direction during the market pull-back. I know most the ETs here will try to keep this as their highest trade secret, but to me this is nothing as you still can't win in long term using this approach with this tiny edge, especially after taking into account the slippage & commission. If you want to discuss more, PM me.
Depends on your definition of "well". To answer these questions correctly you must take your eye away from the microscope and understand what is really happening in the bigger picture. Always study the daily and weekly before you begin your daytrading day because during the morning session they could tell you how the day should be approached. Remember that daytrading's biggest disadvantage is its reduced time limitation to let your winners run, this is even more severe during late afternoon, therefore try to have it clear during the opening hours or most likely the market will punish you. Learn to spot failures and surprises in those timeframes as they could provide predictive value to help you determine if you should trend trade or fade the intraday action. Last but not least not everyday is optimal for daytrading, flat is also a position. There are days when the market is feeling altruistic and giving it away, and others where you are better off stepping aside.
Could you explain a little further why you are saying it doesn't work in long term? I am not a mean reversion trader, but I would like to know. Assuming that this strategy works currently, why would you say it would not work in the long run?
Its just one tool among many and in the long-term one must use more than one good tool. In daytrading in a strong upward or downward trend there are other tools and other analytics to use. This is an elegant tool for short interval sideways trend trading used to take advantage of quote imbalance or just general swings that an instrument has above and below the 10 day mean. You would need very good liquidity (small bid-ask spread) or you might not even get filled above or below the mean. It is a very good place to start building an algo with tick data feed and co- location in order to short term scalp the mean. But once a market quickly brakes downward you would want a different system. PS: also I think galvin was asking for a pm if you wanted in depth answers. Many traders have proprietary stuff which they hold dear and may not give it all in one open post. PSS: You may not even be reading this thread anymore as I see you have started 7 other threads today one each asking a different esoteric question.
When you understand that prices look the same on all time frames, you'd understand also that if trend following works on one time frame then it works on another. If you define short-term trend following as holding for a week or so, you'd probably base your entry on a 4-hour chart. On an intraday basis, you can be a trend follower by holding for the major trend of that day. It's all the same. Just different time frames.
You are basically selling premium: you're the insurance company. It's the same as being short vol...you're making pennies and losing dollars. Of course this is only true if this is all you do.