I wear two hats. One is my green trading hat. The other hat is a yellow investing hat. Why two hats? Because there are two different realms in finance in terms of how we accumulate money. These hats are metaphorical, but they serve a distinct purpose. Here are 10 key reasons to be both a trader and investor.
Your green hat is for trading because it means go. Trading is about timing, getting in out, and picking the most opportune time to get in out. To trade you have to have a different mindset. You have to have high and low parameters that are unemotional. A trade is a short term move that is designed for a profit at that time.
Yellow is for caution; we should always be cautious with an investment. An investment is a longer-term holding. It is something that you plan for the future, will go up in value. An investment should still be watched, but it does not have to be watched daily. The trend of the investment should be watched, but not so much the day to day move. It should be more closely watch when picking it as far as what you think a long-term trend will be.
For short-term trading people should remember some things:
- These Are Trades People. Get In And Get Out – Have a set parameter as I said. I typically have a stop limit in my head. It goes below that and I am out of the trade. Now I have a stop gap to the upside as well. An example for me is this: if a stock has rose say 10%, if it pulls back 5%, I’m out of the trade. If it continues to go up, I let it ride. As soon as it pulls back 5% from whatever the high is, I’m out of the trade.
I used the numbers to simplify it. You can use your own set of parameters. Just make them concrete. Take emotion out of the equation. Even many professionals have been known to get caught up with the emotion of a supposed trade.
- When Out Of A Trade, Forget About It – I was guilty in my early trading days of looking back at the performance of my trades. I remember one specific trade. It was the first time a trade took off after I was out. I made 10% on the trade and got out. I watched as it did another 20%. Guess what happened with my next trade? I rode the win and held thinking I could get more. It went down to my stop loss.
- A Profit Is Not A Profit Unless It Is Booked – This goes back to the previous statement. Remember, any win is better than a loss. It’s okay to take a profit. You add capital for the next trade. If you are in the slightest bit concerned with whether to let it run or close out, sell it for the profit and forget it. Focus the energy on the next trade. This is just my opinion though.
- A Small Loss Is Better Than A Big Loss – This goes to the previous statement. Sometimes taking the loss is a necessity. A small loss is better than a big loss. Once again, if you start the inner discussions to sell, then it’s best to sell. This is where having a stop limit in your head is a good tool to have. Once again, like a gain, sell it and forget it. It does no good beating yourself up over a small loser. I have also seen people hold stocks thinking they HAD TO GO BACK UP. I saw it with a professor who bought Atari. Ouch comes to mind. It hurts me to still think of that trade of his.
- You WILL Have A Loser – I have had them. I guarantee you every person on TradingMarkets.com, and every adviser or trader, has had them. We are not perfect. You are not perfect. The key is to minimize your losses and maximize your gains. If you do this, you will be successful.
The yellow hat of mine has different rules:
- Research At The Start – To pick a good investment you must research it. You should be able to pitch to me that this is a good deal. You must want to OWN IT because of the long term benefits of the investment.
- Do Not Get Too Emotional Short Term – This is why I look weekly at my investments trends. If I watch the day to day moves of it, I would pull my hair out. This is for my long term future and my retirement. It’s not for the here and now. I am not saying that you are to ignore it or forget about it. Just don’t get overly emotional about it.
- It Should Be Income Producing – It should generate its return through income. Whether it’s through interest, dividends, rent, or inflation protection, it should generate a safe income return. That income should beat the inflation rate, with the hope of compounding.
- Stay Diversified – I saw this in 2008. People loaded with dividend stocks in their retirements where the dividends got cut. You should have other investments other than stocks. That’s why it’s investments. It is to be safe. Safety is diversification. I am under 30 and have some bond holding in my Roth IRA. Which leads me to….
- Keep Investing And Trading Accounts Separate – This has been a great thing for me. People should have separate accounts for both. There are days when I will do research for both and evaluate both. But, on a day to day basis I focus on the trading portfolio. Why? My stocks will still yield me my yield, my bonds will still yield me my yield, but barring major market moves, they will stay as is. Trading has more possible return, but comes with more risk and thus more attention should be paid.
I hope these ideas can be of service and help you as they have helped me. Both strategies are good and have their time and place. In the end it is about what suits you and your financial needs.