That’s one of the things that surprised me as I thought about it for more than a decade. In the mid-2000s, the idea of a trader making money on swing trading seemed absurd (in part because of the way stock trading works). After all, a stock or commodity is likely to be volatile, so a buy and hold strategy that puts an investor in a holding period can be risky. But in actuality, traders can actually make huge sums trading the long-term market (see chart 4 in our article The Science of the Trade as examples).
Figure 4. The science of the trade (source: Eq. 2.4 of “The Trade”, by Michael Lewis).
The concept of making money off a long-term market is known as a “time-variant” strategy — i.e., a strategy that has a high reward but is relatively low risk. A trader that takes a short sell at the peak of the market could receive $8,000 while a trader who buys a stock during the next 10 days could receive $25,000. (These are average compensation levels.) An investor who is only looking for a long-term gain could end up with a similar compensation level as the trader that only looks the next 10 days.
In fact, the long-term market has a time-variant structure. According to the theory that underpins “The Trade,” a trader will make money when the stock rises during a low-frequency part of the market on the way to an upper-frequency part and back down again during a higher-frequency part. The reason for the strong correlation across low-frequency and higher-frequency parts of the market in the short-term is because the relative volatility of the shorter-term market matters greatly during the lower-frequency part, and vice versa.
While it’s tempting to speculate that an investor who decides to sell to win might make more money than someone who decides to sell to trade the stock, research has shown that this isn’t the case (for more on this, see our article Why There Are No Trades on the Rise). In fact, according to one study, selling during a low-frequency market leads investors to make far less than buying during a high-frequency market. The reason for this is that, unlike a stock, a trade has to rise and fall by only 1 percent to increase or decrease the investor’s actual payoff. As a matter of fact — not surprisingly! — if investors buy for the
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