How day traders can benefit by incorporating longer-term fundamentals

Day traders, traders holding positions on very short intraday time frames, usually spurn fundamentals analysis, swearing solely by studying the price action. At the same time, the lowest proportion of profitable traders is found in this group. Now, this might not be true for institutional day traders who have order flow statistics at their disposal, but for the average day trader, trading through a retail broker, there are certainly distinct advantages to be gained by incorporating some fundamental macro analysis as a substitute for order flow statistics.

Firstly, by analysing underlying global macro-level factors that motivate buyers and sellers in a given market, the risk for each can be appropriately determined, and should a skew be detected, it may often signal the probability of the development of a trend. This trend may last from a few days or weeks up to a few months. Now you may ask how that would benefit an intraday trader. It would in the same way that checking up on the weather, wind direction, tides etc. benefit a surfer before he decides to hit the beach.

By taking intraday trades only in the direction of the fundamentals trend, or at least doubling up on position size for those trades, a day trader gains an additional advantage in the same way that a card reader is able to gain an edge over the house in a casino game. To understand this from a statistical perspective, take any market trend that was driven by fundamentals: for an uptrend, calculate the number of daily bars where the close was higher than the open divided by the total bars for that period, and vice versa for a downtrend, the number of daily bars where the close was lower than the open divided by the total bars for the period. This number gives a rough measure of the edge, represented somewhere between 0.5–1.

Now, since one of the most sought-after advantages of day trading is that one is able to close all positions at the end of the day (allowing one to sleep much better during the night), an additional benefit to the day trader is the automatic compounding of returns. For simplicity’s sake, let’s say the move lasts for 20 days and rises on average 1% each day. The position trader’s net rate of return would be 20%, but the day trader’s net rate of return would be 22%, because each day new positions get established on new higher equity balances, assuming the exposure is kept at a fixed rate.

In conclusion, it can clearly be seen that incorporating a longer term macro-level strategic analysis into a day trading method can help significantly in sifting out those volatile trading days that usually eat huge chunks out of an equity curve.