interesting reading from Briefing.com
Trading And Investing Are Different
Many Briefing.com readers employ both trading philosophies and investing philosophies. Both are valid approaches to the market. But when you confuse the two strategies, you are just asking for trouble.
Trading Defined
A trade, by definition, is a short term approach to making a profit.
Almost any rationale can be used for trading, particularly very short term trades. Many trade on the basis of momentum, which is simply the premise that any stock currently going up is more likely to continue going up, than it is to fall. Momentum based trading has never been more popular than in the advent of the new information investing era.
Technical analysis is very useful for trading purposes. In the lack of other news events, technical analysis can provide useful information for determining a trading strategy.
But it is a complete error to assume that everyone comes to the same conclusion when reading a TA chart. There is no single interpretation to any chart. Often new investors learn a single TA approach, and begin believing that, because a pattern fits the one described in their TA book, the predicted outcome is inevitable. It just doesn't always happen that way.
There are extremely successful traders who can, and do, care little for the underlying business behind the stock.
Daytrading Defined
Daytrading is a much misused word lately.
Many people attempt to use the word daytrading to capture two very different styles of trading. By definition, a person doing "daytrading" should be closing positions by the end of the day. Otherwise, it isn't daytrading. Selling a stock three days after you buy it is just trading, not daytrading.
Daytrading at a daytrading firm, and daytrading at an online broker should really have different names.
Daytrading at a daytrading firm involves opening an account at a firm which has direct access to the Nasdaq computerized trading system, rather than operating through a broker. There is no such thing as daytrading NYSE stocks when this definition is used. These accounts usually must be closed each evening and require a minimum of $50,000 to open.
Daytrading at an online brokerage, where a single position is taken in the morning, and closed later in the day, is a completely different style.
Regrettably, most of the mass media doesn't make this distinction, yet it is extremely important. Strategy at a daytrading firm usually involves making many very small profitable trades. Strategy for trading a single position is usually just to pick up a few days during the day.
Investing Defined
Investing is ownership of the underlying business behind a stock. The expectation is that when the business grows, the stock price will rise.
Fundamental analysis is used to determine the health of the underlying business. Comparative analysis is used to determine the value of the stock, relative to others in its industry. An understanding of technology is helpful for technology stocks. Some of the best investments are made on the cusp of change in technology.
The Difference
Trading is a play on the changing opinions of other people. All it takes is for more people to start wanting a stock, than there is stock to sell.
Investing is a play upon the growth of a business. This takes time, sometimes years to actually happen.
The ability to stick with convictions regardless of the short term movements of the market is the investor's strongest trait.
The ability of a trader to change his mind, even 180 degrees opposite to the initial view, perhaps even moments after taking a position in the opposing direction, is the trader's strongest trait.
Getting the Two Styles Confused
Briefing.com does not favor one style over the other. Both have their place, and both are valid approaches.
However, it is important not to get the two styles confused, especially with respect to a single position.
For example, a long term investor should view a pure market correction as a positive event, not a negative event. As long as the market for the business your company is in is still healthy, all it means is the stock is on sale. It may, in fact, be a great opportunity to increase a position.
But if you make a long term investment, and then panic because the value has immediately gone down, you are thinking like a trader. Frankly, as an investor, if you can't take a 30% loss in your position, you probably should not be holding stocks, particularly not technology stocks. You should probably own mutual funds.
All too common is the person who takes a position for a short term trade (I'll sell when I get 5 points out of it!) and then winds up holding the stock for six months, just waiting to break even. When you enter for trading reasons, and then hold for investment reasons, you are actually exposing yourself to the downside of both approaches.
Another example of how people confuse the two styles is the "Don't Miss the Boat!" thinking. A very popular enthusiastic line in chat rooms, it somehow implies that if you don't squeeze every dollar out of a rise, you aren't investing well. This is about as misguided as it gets. You can always buy a stock. There is no such thing as missing an opportunity, either as a trader or an investor. There is also virtually no one who buys at the absolute low and waits to the absolute top to sell.
Another example of confusing the issue is when a stock rises a lot on particular news. Do you back off from jumping in, because yesterday it was $5 cheaper?
QualComm rose $17 points on March 26, to $115 (pre-split) when the announcement of their settlement was made with Ericcson. If you chose not to dive in, because you had missed the jump, you missed the even bigger rise, from $58 (the $116 after the split) to yesterday's $193 (QCOM split 2-1 in May.) A trader might have passed on March 26, but an investor who dove in, has nearly quadrupled her money.
Be Consistent
In general, whatever premise you took going into a position, is the same premise that you should use for exiting.
If you have recently chosen a stock to invest in, and the price is down, you need to ask yourself if the basic premise on which you made the investment has changed. If it has not, then you probably should stick with the stock.
If you have recently chosen a stock to trade on, and the price is down, you need to ask yourself if are becoming an inadvertent longterm holder, simply because you don't want the lose. If you think the stock will rise in the short term, perhaps you may wish to continue with a trading strategy, but be clear with yourself about what strategy you are using.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com. |
