In the world of financial markets, there’s a belief that traders are investors, and investors are traders.
I’m not sure where this idea has stemmed from. Maybe it’s from the movies, or perhaps it’s from commentators referring to traders as investors. Either way, this is a misconception.
As someone that’s traded before and now focuses my time on investing, I can say they’re night and day different. Traders and investors are not two sides of the same coin.
What’s the traders’ mindset?
Most traders are very short term oriented. They look to hold positions for seconds, minutes, hours, days, weeks, months, and maybe a year tops. How long they hold a position is entirely dependent on their trading style.
Each one of those holding time frames has its own name to go along with, such as algorithmic trading, quantitative trading, scalping, day trading, swing trading, and position trading.
Using some of those adjectives, it’s easy to tell it’s a short-term mindset. I won’t be bashing trading or saying it’s wrong, it changed my life. Not from a monetary perspective but from a mindset perspective and a deep dive into who I was.
I’ve also met plenty of traders who trade for a living, so it can be done.
The critical thing to remember here is traders are short term oriented and look to profit from the short term moves in the market. They are trading in and out of the market.
What’s the investors’ mindset?
On the other hand, the investor is long-term focused, looking to hold investments for years. There’s no arbitrary number of years put on this one. Some investors believe a good investment is one you can hold for life.
They look to profit from the cashflows of their investments and make investment decisions based on the fundamentals. They don’t buy and sell consistently. It might take a couple of years for some investors to make an investment decision. Whereas a swing trader could place 3-4 trades in the space of a few months.
Although all that being said, there are two types of investors, the active investor, and the passive investor. The active investors are people who’re consistently searching for new stocks and investments to buy. Doing all the research into why it’s a good investment or not, then putting their cash to work.
The passive investor (also called defensive investor) are the investors who manage their money passively by either buying index funds, ETF’s, mutual funds or Listed Investment Companies.
Some differences between Trading and Investing
Traders will use technical analysis to find entry and exit points. They’ll trade on leverage to increase buying power and profit potential. They trade on a risk-to-reward basis called R: R, looking to risk 1 while they gain 2. Or, risk 1 while gaining 3. The size of the reward they look for is dependant on the traders’ style.
Investors, on the other hand, will usually use fundamental analysis. They are looking at cash flows and profit potential of a business or property. They ask questions such as, what’s the expenses this business is incurring? Where’s the revenue generated from? Do I even understand this business? Are they profitable year over year? Are these profits growing year over year? If they’re happy with what the analysis uncovers, they might buy or wait until they can buy the investment on sale.
Hopefully, by now, you’ve started to realize trading and investing have significant differences.
Trading is more work than it’s made out to be!
Most of us want to reach financial independence early. Make easy riches or get rich quick. Trading is one such game that promises huge profits, a relaxing lifestyle, no stress, and no boss telling us what to do.
Some trading teachers and mentors will sell it to you that it’s as simple as clicking a button. That’s not true.
It’s not as easy as it’s made out to be. It takes years of work and dedication, just like anything else you want to be proficient in. You’ll need to spend hours backtesting your strategy to see if you even have an edge. Consistently week after week reviewing all your trades and looking for where you broke your rules or followed them correctly.
You’ll endure months of drawdowns and being a consistent loser. However, you still have to execute your strategy even after you’ve lost 10 in a row. The emotional aspect of that is on another level, but it can be learnt. Just don’t think you’ll pick it up within a year or two… unless you’re very talented.
Thinking in probabilities
You’ll need to learn to start thinking in probabilities, some trading strategies have a win rate of only 30%, for every 10 trades they’ll lose 7 of them. You won’t know when these losses or wins will occur, and there’s no set order to the wins and losses. You might lose 10 in a row, then win 4 in a row.
Traders with a win rate of 30% trade with huge risk to reward profiles such as a 5 to 1. So, for every trade, they risk 1 to make 5. This allows them to lose multiple times in a row then hit a couple of winners, making back all they lost and turning a profit.
Traders know their edge comes from probabilities; they won’t win every time. But if they execute the same strategy repeatedly, the most likely outcome is, they’ll come out on top. Thinking in probabilities is easier said than done, but this can be learnt too.
Thinking in probabilities is needed for active investing, but if you’re trading, you’ll be thinking about it every day while you’re looking for trading opportunities.
Going down the rabbit hole
Maybe I’m alone in this experience, but I’ve spent thousands of dollars on trading courses and coaches trying to reach profitability. Some people call it system hopping.
You can easily get caught up in chasing trading systems and looking for the next thing, that “might” get you to profitability.
My first trading course cost me $5,000. And I worked tirelessly to get to profitability, backtesting for hours, but I couldn’t make their system work.
After that, I spent maybe $1000 on another few smaller courses. Again, hours backtesting trying to make it work, still with no luck. I started to realize I was the problem. So, I spent $3000 on a trading psychologist, which changed my life but still didn’t work.
I found a profitable trader to mentor me, who almost got me to profitability. This mentor got me so close to the elusive, consistently profitable. But then, my poor judgment crept back in, and I system hopped… again. Eventually, I put trading aside to focus on passive and active investing.
I wrote this post intending to show you how hard trading really is.
You’ll see ads and marketing where people are telling you to buy their trading course. Saying things like, “The strategy is easy; it only takes 15 minutes a day” or “we keep your risk capped at 1%, so you don’t have to worry”.
The risking 1% method isn’t some system they created, nearly every trader risks only 1%. The 1% system it’s taught in every trading course, it’s not as if they created it. They aren’t some guru on risk control.
Trading is hard, probably one of the hardest endeavours you’ll ever undertake if you decide to give it a go.
Just know that most online trading mentors won’t tell you how difficult it is. You’ll be bombarded with strategies and false dreams. However, it’s not all bad, and there’re some great teachers out there. Being a profitable trader can be done, just know what you’re getting into.
What do I think now after participating in both trading and investing?
I think most people would be better off learning to invest properly first, either passively or actively. Reading books written by some of the investing greats is the best place to start (and this blog😆). Once you’ve learnt to invest you could take on trading if you still wanted too, just keep the two accounts separate.
Do you prefer to trade or be an investor? Let me know in the comments below!