Investor or Trader... Which Are You?
Most market participants consider themselves to be "investors." But
if you look at a list of the really big winners on Wall
Street, you will see that most of those who make big profits,
list themselves as "traders."
By "big profits" we mean doing better than the S&P
500 Index or Nasdaq 100 Index by a substantial margin over
any three-year period.
Investors
"Investors" put their money into stocks, real estate,
etc., under the assumption that over time, the underlying
investment will increase in value, and the investment will
be profitable.
Typically, investors do not have a plan for what to do
if the investment decreases in value. They hold onto the
investment in hopes it will bounce back and again become
a winner.
Investors anticipate declining markets with fear and anxiety,
but unfortunately, they usually do not plan ahead of time
how they will respond to them. When faced with a declining
(bear) market, they hold their positions and continue to
lose.
We all know investors. In many cases it was us before
we realized how dangerous buy-and-hold investing could
be to our savings.
Investors often have some knowledge of trading. But that
knowledge is tainted by how it is all too often described
in the financial press. Trading is risky, dangerous,
foolish, bad, involves a great deal of work, etc. On the
other hand "investing" is good, reliable and safe.
"Investors anticipate declining markets with fear and anxiety,
but unfortunately, they usually do not plan ahead of time
how they will respond to them." |
Investors had a taste of what buy-and-hold can do to their
capital in the 2000-2002 bear market. They lost again in
the 2008-2009 bear market.
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Traders
On the other hand "traders" take a proactive approach
to their investing. Traders have a defined plan
and invest with one goal, to put their capital
into the markets and "profit."
They "trade" with a plan that tells them what
to do in any situation. When to enter and when
to exit. They never allow large losses.
Being a trader does not mean you must move in
and out of the markets frequently. This is a common
misconception. A trader simply is one who has a
plan for entering and exiting. They know what to
do if their trade goes against them, and they know
what to do when their trade is profitable.
Some traders go short (take bearish positions)
as well as long (bullish) positions. Some are unable
to go short, or they find short positions to be
uncomfortable. Probably the majority of traders
do not ever take short positions.
But traders "do" have a plan. This is where they
differ from investors.
Every Trader Needs A Trend
If you think about it, you will quickly realize
every trader needs a trend to be successful.
No matter what trading method is used, whether
it is pattern trading, swing trading, long term
buy-and-hold investing, fundamental analysis, technical
analysis, buying or selling on news events, IPOs,
splits, you name it. If the stock or mutual fund
does not trend in the required direction after
the trade is made, you cannot be profitable.
This also applies to all asset classes. Stocks,
bonds, currencies, commodities. You must have a
trend to profit.
Putting Trader & Trend Together
There are two major camps when it comes to deciding
what method to use to plan a trade. There are those
who follow a fundamental analysis approach and
those who follow a technical analysis approach.
Traders use both methods to "forecast" future
market direction. If combined with an exit strategy,
either can be successful, but debate has raged
for 30 years over which is the most successful
strategy, as well as whether either method truly "outperforms" the
markets over time.
Some very astute market players have said that
both fundamental and technical analysis approaches,
though they can be profitable, usually are "no
more profitable than an index fund."
There is a scary thought. All that work when an
index fund could do as well?
"Price
is always right. If prices are moving up,
the markets are advancing. Down and the
markets are declining." |
But there is another approach that is almost never
discussed. Many hugely successful traders use it
though the financial press seldom mentions it.
In fact, many who use it are very quiet about their
successes. They do not try to publicly prove themselves
right, they just trade and make money.
This approach is the use of price to determine
trends. Price does not forecast and it does not
predict. Price is always right. If prices are moving
up, the markets are advancing. Down and the markets
are declining.
At FibTimer we are "trend followers." We respond
to what "is" happening instead of predicting or
forecasting what might happen. We "follow" price
and allow the changes in price to tell us "when" to
enter or exit a position.
Using price to determine trend does not allow
trend traders to enter at the exact bottom, or
to exit at the exact top. In fact, trend traders
do not try to forecast the market, but instead
let the market tell them when to trade and in what
direction.
Trend traders wait patiently for prices to tell
them a trend has begun. Then they jump on board.
If the trend fails, they exit quickly to control
losses. Price tells them when to enter "and" when
to exit. If the trend continues, trend traders
have no predetermined profit goal. They stay with
the trend until it reverses.
Cutting losses quickly and staying with a trend
until it ends is how trend traders realize huge
profits in the financial markets. The financial
markets are trending "about" 80% of the time. That
means trend traders are profitable 80% of the time.
During the other 20% trend traders keep losses
very small so that they are ready when the next
trend starts.
This does not mean 80% of their trades are winners,
just that they are in the plus column for that
80%. If you have three losing trades of 2% and
one winning trade of 18% in a year, you finish
with a 12% gain, even though most trades were losers.
This fits the old saying, "cut your losses short
and let your winners run."
Conclusion
Remember that "price" is determined by millions
of investors and traders.
By using price, trend traders take advantage of
the combined wisdom of millions of investors and
traders to trade a successful and profitable market
timing strategy.
Yes, it takes patience to be a successful trend
trader. Yes, it takes discipline to follow the
strategy and make the trades, which many times
go against the prevailing wisdom. This is true
of "all" winning market strategies.
But trend traders who use price to determine trends
have been quietly "beating" the markets for many
years. They will quietly continue to do so for many
more.
Recent articles from the Fibtimer market timing services;
© Copyright 1996-2015, Market Timing Strategies, Inc.,
All Rights Reserved.
Fibtimer reports may not be redistributed without
permission.
Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable. |