End-Of-Day Versus Intraday Trading (Part 1)

One thing that came to mind from my recent blog series on backtesting frustration was the distinction between end-of-day (EOD) and intraday trading.

The most important aspect of EOD trading for me is once daily. This is much different from intraday trading where I could be watching the market continuously. For the sake of this discussion I will assume EOD takes place at the close but I really feel the exact time is arbitrary as long as it is consistent (e.g. 10:30 AM, 3:35 PM, etc.).

EOD trading has pluses and minuses. Checking in on the market once daily is a plus. This makes for a very flexible work schedule. Another plus is the opportunity to realize windfall profits in excess of my target. On the other hand, I believe the biggest minus is the potential to realize windfall losses. If the loss at trading time is beyond my stop then I must take it no matter how bad it is.

One advantage of intraday trading is a greater opportunity to exit trades at a price target. This is because the probability of touching a certain profit level exceeds the probability of closing at that level. Suppose I am up 8% on a long stock trade with a 10% profit target. A small amount of market volatility the next day will likely push the trade to +10%. To close at +10%, though, the market has to have an up day. In this case I would not be able to capitalize on so many of the choppy days where the market is higher intraday before closing lower.

Another advantage to intraday trading is the opportunity to realize tighter stops. Suppose my trade with a 15% stop-loss closed down 14% yesterday. As an EOD trader, should the downtrend continue today then who knows how far beyond -15% the trade might be when I have to exit at the close? Were I trading intraday, I could likely exit much closer to that -15%.

This is also a disadvantage to intraday trading, however. I may sometimes get stopped out for a loss on trades that briefly fall below my stop only to see them reverse higher as they ride off into the sunset without me, never looking back.

EOD or intraday? This is a tough, tough deliberation.

I will continue next time.