This article was first published by Truewealth publishing.
“Investing should be like watching paint dry or watching grass grow. If you want excitement… go to Las Vegas.”
This is a quote from the American economist Paul Samuelson sums up the difference between investing and trading – investment is the patient… trading is for those who want more excitement as they search for profits.
Any type of investable assets, whether it be individual stocks, stock index ETFs, bonds, commodities or foreign currency that can serve as a long-term investment or traded for short-term profit. The main difference with the as you wait to the assets.
Traders will buy the asset and hold it anywhere from a few seconds to a few weeks. Over the past decade or so, thanks to the explosive growth in computing power, an increasing number of trade – called high-frequency traders – suitable for only fractions of a second. Some of these traders even make use of algorithms to automate their trading processes.
All types of traders be one of the main goals – to make short-term gains on the investment, then sell it and move on to the next idea.
Different types of trading strategies
Some momentum traders who are looking for assets that strengthen the major move up or down and you have a large number of shares trading hands, or high trading volume. They hope the momentumwill continue, and the assets until the price reaches a predetermined level – which can take minutes or a whole trading day.
Technical traders look for patterns or trends in stock, bond, index or currency charts. Then make war on the basis of what the same those patterns have done in the past. You may not know anything about the assets they are buying or selling… their decision is only based on what the chart looks like.
Patterns may be names such as the “double rule“the”V-Reversal,” “head and shoulders top” or “bottom.”
Day traders often Trade Technical – you may look at many charts and indicators before the markets open in the morning. They will then make trades throughout the day in an attempt to profit from the hope scheme we will look at later in the day.
Other technical traders to hold investments for a period of several days or several months. Investors also use technical research to make investment decisions for the long term, but they usually base the decision on the long term graphs that show longer-term patterns, not just on what happened today or the previous month.
There are also trade commodities. That based trading decisions on an asset in the fundamentals – things like earnings, profits and debt levels. Short-term fundamental trader may purchase or sell securities on the basis of the next profits of the company for or expected acquisition.
Since the change in the company’s fundamentals could take the time to heavily on the stock price (though from a sudden change in the basics, such as when the company doesn’t make as much money as analysts expected, will have immediate impact on the share price) and fundamental traders often hold a position for several days or weeks.
Trading is not for everyone
Being short-term, the active trader can be a lot of work, very stressful. We know quite a few bright people who thought they might do some day trading in the morning, make $ 1000 before noon and take the rest of the day. But they soon discover that doing it day after day is not that simple – you can easily lose $ 1000 before noon if you’re on the wrong side of the trade.
That said, many of the investors who do not make a living as traders – but you know what you are getting into. And being a Successful Trader requires more hard work than luck.
Successful Traders have three things in common: they choose one short-term trading strategies (such as momentum, technical or Fundamental, mentioned above) and stick with it, they take a disciplined approach and have nerves of steel.
Three keys to disciplined trading
A disciplined approach to trading involves the right mix of assets and how to set your position size and stop loss levels.
Many traders put a lot of time searching for what stocks to buy. But hardly any think about how many of the stocks that you should buy. Find out the optimal position size is vital to the well-thought-out investment strategy. Amount to buy should be determined, not by how much money you want to make, but how much money you can afford to lose.
To help determine your position size, you also need to know your stop loss levels. Stop loss or trailing stop, reflects the largest amount of money you’re comfortable losing on the investment. So, if you don’t want to lose more than 25 percent of your position on stocks, you can set your stop loss Price 25 percent less than the price you paid for the stock. So, if you pay $ 20/ share, your stop loss level $15 ($20 – 25%).
As the share price moves higher and now you don’t want to lose more than 25 percent on the top rate, you can put the trailing stop level. Even if that $20 stock moved up to $ 25, the tracking level of 25 percent less than that or $18.75 ($25 – 25%). If the price goes to $ 30, the trailing stop would be $22.50, and so forth.
Now you can use your stop loss and target to find out your position size.
Let’s say you buy $ 20 of equity and you couldn’t handle it if the stock price fell to less than $ 17. So, $ 17, that would be your stop loss.
Now consider how much of a paper loss (as have gone down on paper before the loss from the sale of the site) you can handle. With the $ 100,000 portfolio, you may feel that $2000 loss will make you nervous. So simply divide $2000 $3 per share loss, you decided that you can tolerate ($20 – $17 = $3), and you can get your position size. In this case it will be 667 shares.
Here is the basic formula (this is just one of the dozens available) table to illustrate:
(Maximum $ risk)/ (current share price-stop price) = position size
To calculate position size
1. Portfolio Value2. The loss of Tolerance3. The maximum amount of risk (3) = (1) × (2)4. The current Price5. Stop Price6. The size of the position(6) = (3)/ [(4) – (5)]100,0002%2,0002017667
Asset allocation and risk management
The other part of being a disciplined trader is to know what asset allocation is best for you. Asset allocation refers to the mix of stocks, bonds, cash and other assets in your portfolio. Some say asset allocation is the number one factor affecting investment returns.
For example, it’s a terrible idea to use all your savings to “play the market” as a trader. Thing is wise to just use a part of the overall portfolio of development – and leave the rest as a good mix of long-term investments, such as the payment of dividends, bonds, cash and some gold.
The part you want to use to trade with, make sure to spread your exposure around a few different sectors. For example, maybe you don’t want to just energy trading the company’s shares or short-term foreign currency trades. Instead of getting familiar with some of the different sectors so you can make note of war in any of them. This way, if one sector tanks, your entire portfolio of trading will not go down the drain.
And even if it does not, because the “Diversify your assets” by the presence of the rest of your portfolio in long-term investments, it will be less painful.