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Is there a big difference between trading long and trading short ?
Platform: NinjaTrader (It's a love/hate relationship)
Trading: CL, TF, 6E
Posts: 169 since May 2010
Thanks Given: 60
Thanks Received: 314
It really depends on which market. In some markets, YES there is a difference in the behavior of bear moves vs. bull moves. Tops also form differently than bottoms in some markets.
Both YM/ES and EURUSD behave in a similar way. If the appetite for risk grows, investors will be buying stocks and selling USD for higher returns elsewhere and also buying Euros. If investors have angst, they will rush for the exit and sell stocks and Euros.
Fear is a stronger feeling than greed, so you will have stronger feedback loops, when the investors rush for the exit. Therefore stockmarkets and index futures usually have sharp troughs and flat peaks. Also the down swings are larger in size and shorter in time.
The Euro behaves similar as stocks, maybe with a little bit of moderation. Commodities show an inverse behaviour. The production price puts a floor beyond price, so the valleys are flat. But you will notice sharp peaks in commodities.
If you read a book on econophysics, you can find a mathematical description of U-class and S-class peaks and troughs, which follow different probability distributions.
Another difference between long and short positions are short squeezes. Short squeezes do rarely occur to instruments that are cash settled such as index futures and currencies. But you can find maginificient exmaples for short squeezes in commodity futures - typically a few days prior to settlement and due to constraints on physical delivery - and single stocks. The short seller has to make a delivery and therefore is willing to pay any price. There is no thing such as a long squeeze. The long can only be squeezed by the bank via a margin call. If this happens to many market participants at the same time, it is called a financial crisis.
thanks for the great answer. I just wanted to see if others see the same. I made strategies for YM from 05. 2002 and I could not make the Long and the Short strategies to be the same. So as far as I see it is OK that they are different.
If the results for short and long strategies are not different, you have made a mistake!
There are extensive studies on the assymetry of the markets. A very nice book - but mathematics are difficult to understand - was written by Betrand M. Roehner: "Patterns of Speculation". His examples include
- the wheat market in Normandy and Paris between 1809 and 1815
- the sugar market from 1972 to 1977
- the silver market from 1972 to 1986
- price peaks for postage stamps between 1936 and 1954
- stock markets from 1870 to 1972
He gives a mathematical desctiption for two classes of peaks, which he calls U-class and S-class peaks. For both types of peaks he finds an increased correlation between prices of different items udrign the peak.
This is quite important, as you would look for different topping patterns compared to bottoming patterns, even if you do not understand the somewhat complicated mathematics of the probability distributions.
thanks for the answer. Can you hlep me from where to get Betrand M. Roehner: "Patterns of Speculation" ? This book really seems to be interesting for the long run.
Attention, this is difficult stuff. There are a few books on econophysics. The authors are typically theroetical physicists, meterologists and geologists. These guys are used to develop mathematical desrciptions of complex multi-agent systems.
The point is that economists have for too long relied on their equilibrium models, which do not work in all circumstances. If there is equilibrium it is temporary, followed by an avalanche. There is a number of good books dealing with this, and I would not start with the one of Roehner.
Recommended as an introduction
Benoit Mandelbrot: The Misbehaviour of Markets: A Fractal View of Financial Turbulence (great classic)
Eric D. Beinhocker: The Origin of Wealth (easy read)
Only if you are interested in the mathematics (I am still fighting my way through some of the chapters)
Didier Sornette: Why Stock Markets Crash (requires some undergraduate mathematical knowledge)
Bertrand Roehner: Patterns of Speculation (requires some undergraduate mathematical knowledge)
All books available on www.amazon.com or other internet bookshops.
These books won't help you to develop any trading strategy, but rather explain how markets work, and why there are periods, where markets behave random (the Black-Scholes option valuation formula assumes random behaviour) and other periods, when there is high auto-correlation. This can be shown by empirically byanalyzing the ditribution of market prices, which are clearly non-Gaussian. Mandelbrot show this in his paper on the cotton market.
