Harnessing the Power of In and Out Trading: Unveiling the Profit Boosting Strategy through Margin Efficiency
By Robert Buran
A Deep Dive into In and Out Trading
In and out trading, a well-known strategy in the stock market, typically refers to a trading style where a stock or security is bought and sold within a notably short period. However, it’s important to clarify that ‘In and Out Trading’ isn’t synonymous with day trading. The definition of ‘short period’ can indeed extend beyond a single day. A trader leveraging this approach aims to pocket a profit within this brief time frame and promptly exits the position, implying more frequent trading actions compared to traditional buy-and-hold strategies.
Short-Term Stock Trading: A Proven Approach Over Four Decades
In my terminology, In and Out Trading is essentially short-term stock trading, a strategy I’ve employed successfully for over 40 years. My typical approach involves holding trades for two to three days, without resorting to day trading. It’s conventional wisdom to label in and out trading as risky, but my experience begs to differ. I firmly believe that In and Out Trading mitigates risk by restricting the time a trader is exposed to potential adverse market movements.
Margin Efficiency: A Groundbreaking Concept for Trading Stock Markets
This article explores the In and Out Trading strategy, comparing the relative effectiveness of long-term versus short-term strategies for trading stock markets. Furthermore, it introduces an innovative concept I’ve coined as “margin efficiency.” This principle unravels how relatively straightforward short-term, in and out trading systems can attain impressive profit levels while concurrently reducing risk.
My Journey Through the Trading Landscape
My trading journey started in 1984. Much like many beginners, my initial ventures resulted in a loss of a few thousand dollars. However, by 1985, I had begun to grasp the nuances and managed to make a few hundred dollars in my second year of trading. By 1986, my earnings were close to the six-figure mark. From that point onward, there was no looking back. I’ve handled accounts as small as $3,000 and as substantial as $6,000,000 (refer to my article ‘Journey to Big Trading: Scaling from $6000 to Multi-Million Dollar Trade’). The common thread across these accounts was my use of short-term trading strategies.
The Unraveling of a Surprising Success
Interestingly, I found my success somewhat puzzling. I was working in the public schools then and had no formal academic background in finance, mathematics, statistics, or computer programming. I implemented a straightforward breakout system that had me entering one day and exiting the next, bypassing day trading. Although this system is far from rocket science, with several published variations available, it proved to be incredibly effective. This strategy didn’t seem overly risky, but it led to annualized gains surpassing 100% year after year. Astonishingly, I was outperforming top professionals using a system built with arithmetic skills acquired in 5th grade. This kind of performance was a direct contradiction to conventional beliefs surrounding performance and risk.
The Genesis of the Margin Efficiency Theory
Over time, my experiences with in and out trading led me to develop theories about market behavior and money management. I aimed to understand why this simple short-term breakout approach to trading was performing so well. In this article, I am going to discuss one of the most crucial of these theories, my theory of ‘margin efficiency’.
Illustrating Margin Efficiency Theory: A Simple Study
To elucidate my theory of margin efficiency, I will refer to a straightforward study I conducted on a single market over a 34-day period. I’m revisiting data from 14 years back in 2023 because that’s when I began to solidify these concepts. I must stress that studying just one market for only 34 days doesn’t yield statistically significant findings; this study serves purely for demonstration purposes to explain my theory. The study itself doesn’t prove anything but is used to illustrate my theory of margin efficiency.
For the study, I compared two systems I will simply call LONG TERM BREAK OUT SYSTEM and SHORT TERM BREAK OUT SYSTEM. I chose the NASDAQ market SEED, which represents Origin Agritech Limited, as the subject of this study. The test period spanned over 34 trading days, from 11/24/09 to 01/12/10. Following my money management strategy, both systems bought and sold 80 shares for all trades, designed to limit the cash margin requirement to approximately $1,000 per trade. During this period, SEED fluctuated between approximately $6 and $14.50 per share, making it a highly volatile market and thus suitable for my trading strategies.
Here are some numbers that emerged from this study:
- Long Term break out system
- Short Term break out system
The study duration was from 11/24/09 to 1/12/10 (34 trading or “Study” days).
The LONG TERM SYSTEM made one trade lasting 34 days: It bought 80 shares of SEED on 11/24/09 at $11.74 (cash margin requirement $939). It sold the 80 shares on 1/12/10 at $14.14.
Unveiling Margin Efficiency: Profits and Calculations
The LONG TERM SYSTEM achieved a net profit of $192. After deducting $10 for transaction costs, the ACTUAL NET PROFIT becomes $182.
On the other hand, the SHORT TERM SYSTEM completed six trades, buying and selling 80 shares each time. Each trade lasted two days, buying at an average price of $12.00 (average cash margin requirement was $960). There were three winning trades totaling $451 and three losing trades costing $259.
The net profit was $192. Subtracting $60 in transaction costs gives an ACTUAL NET PROFIT of $132.
To evaluate the effectiveness of these strategies, I devised a formula for calculating margin efficiency (ME):
Margin Efficiency (ME) = ((Study Days / Days in Market) * (Actual Net Profit/ Cash Margin)) * 100
This should be read as the number of Study Days DIVIDED BY the number of days the trade is in the market, TIMES the Actual Net Profit DIVIDED BY the required cash margin (price times the number of shares), TIMES 100.
Plugging in the numbers for each system, we get:
LONG TERM SYSTEM: ME = ((34/34) * ($182/$939)) * 100 = 19.38
SHORT TERM SYSTEM: ME = ((34/12) * ($132/$960)) * 100 = 38.91
Interestingly, the ME for the SHORT TERM SYSTEM is twice what it is for the LONG TERM SYSTEM. Theoretically, this implies that a portfolio with an ME of 39 should generate twice as much profit as a portfolio with an ME of 19.
To grasp this better, let’s return to our study. The LONG TERM SYSTEM made $182 in 34 days with no idle days. For those 34 days, a trader could only engage with ONE market using the allocated cash margin.
In contrast, the SHORT TERM SYSTEM made a slightly lower profit of $132 but was only active in the market for 12 days. Therefore, within the 34-day study period, there were 22 days where the system was idle, allowing other markets to use those free days without increasing the margin requirement.
Capitalizing on ‘Blank Days’: Short-Term vs Long-Term Systems
With the SHORT TERM SYSTEM, those blank days can be filled with short-term trades from other markets. This approach can potentially generate much higher profits within the same timeframe, compared to the LONG TERM SYSTEM, without the need to increase our margin requirement. So, how much more can we earn?
If the LONG TERM SYSTEM generates $182 in 34 days, it’s making about $5.36 per day. On the other hand, if the SHORT TERM SYSTEM makes $132 in 12 days, it’s making approximately $11.00 per day.
Should we fill in those 22 blank days with trades from other markets that also yield $11 per day, we could add $242 (22 days * $11 per day) to our net profit of $132. This would total net profits for the SHORT TERM SYSTEM to $374. As a comparison, the LONG TERM SYSTEM only made $182. It’s important to remember, however, that these figures are theoretical, as market conditions seldom perfectly align to fill in these blanks.
Another way to compute a theoretical value is by utilizing the ME numbers we already calculated. If we divide the SHORT TERM SYSTEM ME of 38.91 by the LONG TERM SYSTEM ME of 19.38, we get 2.01. By multiplying our original SHORT TERM SYSTEM profit of $132 by 2.01, we arrive at $265.
Therefore, we now have two theoretical projections for the SHORT TERM SYSTEM’s profits over a 34-day period: $265 and $374. The actual result likely falls somewhere in between, as it’s improbable that all blank days will be filled by markets as volatile and high-performing as SEED.
Implementing Short-Term Trades into Multiple Markets
How then do we fill in these blank days with trades from other markets? This question starts to delve into the theory of money management, which is too extensive and complex to cover in this one article. Nevertheless, the straightforward answer is that I engage in trading across a wide array of markets. As of 2023, I’m active in over 50 markets, ensuring all the ‘blank’ days are utilized. Moreover, with a SHORT TERM SYSTEM, I can trade in far more markets using the same amount of capital than I could with a LONG TERM SYSTEM. This approach not only maximizes my returns but also reduces risk via market diversification.
To put it simply, this is the essence of in and out trading. The short-term in and out approach works because it is margin efficient. My theory of margin efficiency partly elucidates why these uncomplicated, short-term breakout trading systems can deliver high returns with limited risk.
When devising a trading strategy, you should seriously consider adopting a short-term trading approach, which I simply refer to as Short Term Stock Trading. By combining this with high margin efficiency, you can mitigate your risk while reaping significant returns on your investment.
As of 2023, I’ve incorporated these concepts I developed many years ago into my current trading system, JORDI FUSION. This system effectively utilizes the power of in and out trading, leveraging margin efficiency to boost profits and reduce risks.