The Time-Effort-Reward Ratio (Are You Making This Mistake?)

A trader dropped me a message yesterday asking why short-term strategies are more profitable than long-term strategies and I kind of presumed that everybody understood why this is and how this works but the Email taught me that that’s obviously not the case and that a lot of traders don’t seem to understand why this is, so I thought I’d put together a video on the topic for you all to help any of you who don’t quite understand this yet to gain a full understanding of this, now,

First thing’s first, and to dive straight in, what this comes down to is probabilities and allowing edge to play out. If you’ve followed me for any length of time and you’ve watched any of my other videos here on the YouTube channel you’ve probably heard me talking about these aspects of trading again and again and it’s because they’re just so crucial to understand, and in the case of why short-term strategies are more profitable than long-term strategies, this isn’t exactly the case and to explain what I mean, lets look at an example together;

If you’re trading a short-term strategy and you’re lets say day-trading and taking one or two of three trader per-day or more, this is going to mean that you cover an accurate sample-size of trades much, much quicker than if you’re trading a long-term strategy and you’re swing trading or position trading and only taking a handful of trades per-week or per-month. Again, coming back to that ‘accurate sample-size’ that I always harp on about, with any less than five, ten, twenty trades, outcomes are pretty much completely random and more or less anything can happen. It’s only when you’ve taken a good twenty five, fifty or more trades that you’re always going to see your edge playing out.

Now, let me just very quickly add a note here on the subject of edge, obviously to see an edge play out and deliver profit you have to actually have edge and be trading a strategy that provides edge. If you’re trading a broken strategy or an unproven strategy that doesn’t work, whether you take five trades or fifty trades or five hundred trades you’re never going to make money and you’ll consistently lose money, so before you even think about any of what we’re talking about here today above anything if you are trying to trade profitably do make sure that you have a strategy that works and is statistically-proven to provide edge because without this nothing will ever help you make money.

So, with all of that said, this is where the title of this video is about to become clear. The ‘Time-Effort-Reward’ ratio, what is it, how does it work and how does understanding this help to increase profitability. Lets get all of those questions answered.

Time: This is how long you spend trading and how many trades you take on lets say a daily and a weekly basis.

Effort: This is the effort you put in, the hours you spend at the screen monitoring for setups and executing and actually taking trades.

Reward: This is your edge playing out and delivering profit.

This is where things get interesting…

– If you’re trading a short-term strategy, in most cases you’re putting in a lot of time, a lot of effort and because you’re taking an increased amount of trades and your edge is playing out faster, you get that all-important reward much quicker.
– Opposing this, if you’re trading a longer-term strategy, in most cases you’re putting in a lot less time, a lot less effort and because you’re taking less trades and your edge is playing out slower, the results take much longer to get to and the reward is of course delayed.

So just to summarise and simplify what I’ve just said;

Day Trading:

Time = Increased / Effort = Increased / Reward = Increased

Swing and/or Position Trading:

Time = Decreased / Effort = Decreased / Reward = Decreased

Hopefully by now you understand how the Time-Effort-Reward ratio works and whether you’re day-trading or swing-trading or however you’re trading, just take a second to think about how much time and effort you spend trading and the reward you’re achieving because again, these should be aligned. If you are a short-term trader and you’re taking multiple trades per-day you’re going to see results much quicker, and if you’re a long-term trader and you’re only taking a handful of trades per-week or per-month you’re going to have to wait that bit longer to see results.

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