Trad­ing vs in­vest­ing

Finweek English Edition - - INSIDE - BY SIMON BROWN

We tend to fo­cus ex­clu­sively on in­vest­ing in this col­umn; af­ter all it is ti­tled In­vest DIY. But this week I want to fo­cus on trad­ing as dis­tinct from in­vest­ing.

Typ­i­cally, an in­vestor is fo­cus­ing on long-term cap­i­tal gain, while a trader is look­ing for quicker prof­its or in­come. Ac­cord­ing to the Sars def­i­ni­tion, if you sell within three years you are trad­ing, and I sub­scribe to that def­i­ni­tion.

The idea be­hind trad­ing is that prof­its will be made quickly; those in­vestors who are new to the stock mar­ket are of­ten dis­mayed at how long it will take to cre­ate wealth via long-term in­vest­ing. The re­al­ity is that wealth cre­ation on the mar­ket is easy, but it will take decades.

Traders try to shorten th­ese pe­ri­ods by us­ing much shorter time frames and im­por­tantly us­ing de­riv­a­tives such as fu­tures, con­tracts for dif­fer­ence and op­tions t rad­ing for­eign ex­change, stocks, com­modi­ties and in­dices.

The prob­lem is that a new trader sits down in front of their com­puter with a newly opened trad­ing ac­count and some spare cash re­cently de­posited, ex­pect­ing to be rich in no time at all. The out­come is starkly dif­fer­ent as the vast ma­jor­ity of new traders bust out, in many cases los­ing more than they started with. So, what goes wrong? Well, a few things, the most im­por­tant sim­ply be­ing a lack of the skills re­quired and a lack of risk man­age­ment. When we start trad­ing it is too easy to start with no knowl­edge or skills.

In fact, there is no sense that trad­ing is a skill and that skill needs to be learnt. If we wanted to be an elec­tri­cian, brain sur­geon, ac­coun­tant or any other ex­pert we’d first spend years learn­ing the skill be­fore start­ing a job at the bot­tom of the lad­der and work­ing our way up to the top over the years.

Yet a newbie trader reads a book and maybe at­tends a course and thinks they are the real deal. But they are not; they are about to be parted from their money, and it’ll be painful.

So, we need to de­velop the skills to be a suc­cess­ful trader. The first port of call is to learn the ba­sics. Un­der­stand the dif­fer­ent prod­ucts, what their benefits and risks are, why one should be traded over an­other. One also has to un­der­stand the trade trig­ger process, typ­i­cally us­ing tech­ni­cal anal­y­sis. This knowl­edge is not rocket science but the time does have to be spent learn­ing the ropes.

Then comes the re­ally hard part of trad­ing, the psy­chol­ogy. Trad­ing is mostly about our emo­tions and man­ag­ing the fear and greed cy­cle of be­ing a trader. This is the very hard part and one of the best books on this topic is Trad­ing in the Zone by Mark Dou­glas.

The next les­son is about man­ag­ing risk. A new trader of­ten thinks that trad­ing is about tak­ing mas­sive risks, but it is not. A large risk means one move against you and you’re wiped out. Keep­ing risk to a man­age­able level is one of the keys to sur­vival.

The l ast piece of t he puz­zle i s dis­ci­pline. Trad­ing is about hav­ing a strat­egy and stick­ing to it. On pa­per this sounds easy but there is a great deal of what I call noise try­ing to push you off your trade. This in­cludes data f low, com­ments, opin­ions and the like.

So, if you want to be a trader start at the bot­tom and de­velop the skills be­fore wildly jump­ing in, and ex­pect this process of learn­ing to take time, po­ten­tially years.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.