Optimally Effective Timeframe (OET)

Rate of return is a function of time; any return (positive or negative), when annualized for comparison basis, is bigger (magnified) for shorter holding periods than longer holding periods. It's better to make money quickly; but don't confuse better with easier. If you are like most people, the only thing that happens quickly on Wall Street is losses. It's frighteningly easy for the Trading Idiot to quickly reduce the size of their brokerage account. However, it's also relatively easy to make money slowly over time using my Rules of the Trade, which promote growing your savings as an opportunistic longer-term Value Investor. Profitable shorter-term returns require a significant increase in trading skill, risk management, expense, and a much greater commitment of time and attention to real-time markets. Furthermore, the shorter your time horizon, the more you'll have to compete against professional traders and their super-computers, who are often backed by a well-trained support team and led by a seasoned manager to enforce discipline. It is very unlikely that you'll ever be able to out-trade these pros (the best of the best) over time; but you can earn a better total return than that offered by the big professional fund managers, if you learn to operate like them* and keep your cost structure below theirs, which is actually easy to do. And if you keep your eye on the macro economy, the market, and have some ready cash, every now and then the market will give you a lower-risk, high-reward opportunity to capture a relatively quick capital gain thanks to the market's tendency to over-react to breaking news and the short-term traders tendency to drive the current trend to unsustainable premiums and discounts; but you've got to learn how to spot these opportunities. In the long-run, economics and business fundamentals will drive price valuations; but in the short-run, traders drive prices based on technical patterns, breaking news and commentary, which can occasionally drive prices to irrational extremes when viewed from a fundamental economic and business perspective. It's these shorter-term moves that drive prices to discount and premium levels and the waiting arms of big professional fund managers. *Most big professional fund managers operate as patient value investors, buying at discount prices (this creates Support) and patiently selling at premium prices (creating Resistance), and whenever possible they earn income while they wait. These Support and Resistance levels can be seen on charts and you can learn to trade like (with) them!

Using the Rules, learn to become a Consistently Profitable Trader (CPT) in the longest and easiest timeframe (the economy's boom-and-bust cycle). Once CPT status is achieved, work to reproduce the prior results in a slightly quicker timeframe using only a small portion of your capital base to avoid big losses. Once CPT status is re-achieve, you're free to slowly increase your position sizes, while probing the next quicker timeframe. Continue the process until you find that you're unable to re-achieve CPT status, go back to a prior CPT timeframe, that's your current Optimally Effective Timeframe (OET) in the current market environment using your current skill set. But please note that the market is dynamic and can change, and so is your ability to learn. So your OET can and will change over time.

The key to compound growth is to first make a profit and then to use that profit along with the original investment to make an even bigger profit. Amazing compound growth occurs when the size of the invest gets bigger and/or when the time interval between profits gets smaller. But never forget that compound growth works for losses too and that's why we must maintain our CPT status and to focus the bulk of our capital in our OET.

Stan Benson