Trading or Investing?

In two hours time I shall be leaving for a flight to Holland to present a spreadbetting trading seminar. To most people when they think of Holland they think of tulips. But for me, Holland certainly brings to mind the year 1637.

At the time, tulips were selling for 5,500 florins and then crashed to 50 florins. Then in 1929, a US stock Air Reduction, fell from $233 to $31. Moving ahead to the late tech boom it was not uncommon to see stocks trading at $250. And now some of these stocks are trading around the $20 - $30 range.

What does this mean for you?

Whether stocks are trading at extreme highs or lows really does not matter. As a trader you are interested in movement not value. It’s amazing how a trader can sometimes get caught up in a frenzy and not realize what his or her aim is.

Remember that your job is to take profits from the market with low risk using leverage. As a trader, are you interested in the value of the particular stock or do you want the stock to move in your direction? For me, as long as the stock has good liquidity and reasonable size moves then I want to play. I really don’t care if the stock is trading on the upside or the downside. I am just looking for movement.

I recently spoke to an individual who did not realise that trading and investing required two different ways of thinking. He traded mostly on the long side of the market and once a position had been established his view was that this stock was going up. For whatever reason, once the stock started to go down he would then start searching for reasons why he should hold the position. He usually found a reason or two or three.

As a trader, if a position moves against you – get out. An investor might be holding this position with a long term view in mind. He does not mind if the stock drops in value. In fact he may even think that at a lower price it might be worth buying more. This is called averaging and is highly dangerous in a leveraged business.

Decide from the offset if you are a trader or investor. There is nothing wrong with being either or both but just make sure you understand the difference between the two.

Until next time, I wish you safe trading.

Sandy Jadeja | Chief Market Strategist

sjadeja@odlmarkets.co.uk