Investing or Trading?

Investing

Investing is buying into something that appreciates. In stocks and shares, any price increase after about a year is 100% because of the fundamentals: the strength of the books, the management, the continued saleability of the underlying product; to mention a few.

Most of us have investments in pensions or managed funds.

Over a bunch of years, the market goes up about 9% on average. However, somewhere between 7 to 15 years, the market crashes. Timing is everything.

Moreover, most pension and managed funds don’t beat the market, actually an astonishing 95% of them; on top of that; they charge several percents annually to do so.

If we need our invested funds, 15 years before would be best, move it into something that is not market-based, at least not ‘fundamentally’ based.

Trading

Trading is generally over a shorter time frame and is mostly technically based: that is, the reaction of price when the price reaches support or resistance. In its purest form, it is one person’s opinion (or computers) against another.

And, as a computer does not have an opinion – it is, of course, emotionless – that presents the most significant obvious challenge to most human traders.

Some 75% of trades are institutional based (big money). The remainder is made up from other entities such as high-frequency trading (HFT) systems, significant hedge funds and the like. Smaller (professional) organisations and home traders represent less than 5% of the market.

To be clear, when the (small) professional trader or home trader trades she is up against the institutions – computers mainly – so she better knows her unemotional stuff.

That is probably why few home-based traders, notably lower timeframe traders like day traders, make it. Cheery, eh.

The one factor more than any responsible for successful trading is – no it’s not luck – is trade management, tedious as that sounds. Proper trade management always provides a positive traders equation of risk, reward and probability.

Without a precise calculation of each of these (and the probability is often the one missed) then we are not trading but doing something else. Gambling, maybe.

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