The Difference Between Trading and Investing

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That’s it.

Ok good post. See you all on the next one…

Just kidding.

Mindset controls everything. Let’s look at the difference between a trader and an investor; how they look at charts, how they execute trades, why they take the trades they do and then let’s see if these two mindsets are competing in our trading activities.

First off, The Investor:

When I think of investors, I think of Warren Buffett. Buy and hold. Long term decisions for big payoffs. I think of the movie and book “The Big Short” because they took a position and waited until that position payed them. Granted, Buffett would say it’s only an investment if you are willing to hold it forever and I will get into time frame later but I think you are understanding what I am saying.

What are some characteristics of an investor?

  1. Position Building- Investors build there positions over time usually by buying or selling instruments in chunks. Think of the mutual funds or big hedgefunds. They can’t take all their position in one swipe because the market usually isn’t offering enough so they must scale in and then hold and scale out.
  2. Daily time frames and above- no self respecting investor would be caught dead on a 15m chart. They take into account long term views, that’s it.
  3. Investment Thesis- Investors love time because they feel like over time, their bet will pay off. They pick tops and bottoms and hold for the “big move”.
  4. Money management- Investors don’t use “stops”. They believe in an idea or an investment theory and will see it through to the end. It is difficult for investors to determine when to get paid. When do you stop investing in something?

Now the trader. Traders are like grizzled snipers on the front lines. Every decision has it’s own unique risk and second chances are not common. We get one shot at making the right choice and we have to accept the consequences of that choice, good or bad, and then move on to the next one with out ever thinking about the last shot. Traders make decisions in the immediate and manage time accordingly. Investors make decisions in time and manage the immediate accordingly.

What are some characteristics of a trader?

  1. One main position- traders take a major portion of their position at one time in one specific area for one specific reason. They are market timers that need to be patient for the entry, not patient while they wait in the trade.
  2. 4hr Time frame and below- Traders like to enter and manage trades on lower time frames, 15 minute and 1 hour are common. It helps us be more precise with our entries and manage risk in ways investors don’t have to.
  3. Trade thesis- Usually based on the momentum of price, not big turns or tops and bottoms.
  4. Money management- Traders employ stops to cap risk, much like a bet. That is why we are called speculators. Traders set areas to target for price so they can get paid. They can clearly define where they want to get paid.

Well, that’s not an extensive study on the difference between traders and investors but it’s a start and will suffice for the rest of my post.

One of the biggest mistakes I have made and actually still find myself getting sucked into this once in a while is crossing these tow mindsets. Mixing the two is a toxic cocktail of indecision and confusion but answering the question and defining your style and what you want out of the markets will increase your chances for success.

Am I a trader or an investor?

The first step to defining this is to ask myself, “what do I want from the market?” Investor returns in terms of % are usually smaller than that of a trader. I think that’s obvious. If I need 3k a month and I have a 10k account, what would I be looking for? Investment returns or trading returns? If I want $100 a month on that same 10k account would I be looking for trading returns or investment returns? Which one could a person use for full time income? Now, I AM NOT SAYING YOU SHOULD TRY FOR 30% RETURNS A MONTH. This is an example.

We all want the 50% return right? Well then you have to approach the market as a trader. Position sizing, loss management, killer instinct all come into play.

Let’s say I have a full time job and I want to put some extra cash to work and I want to use the FX market to beat the S&P annual returns, my approach will differ considerably from that of an individual trying to trade for a living. The risk needed to accomplish this is much much less than the risk needed to make big % every month.

What happens when these two mix?

Bad things. Very bad.

If you want to make a living off of “investments” and using markets that way; small trade sizes, no stops, lots of time, then you had better have a hefty sum of money to start with. If you are like most traders that start out, you aren’t starting with a 250k account. Let’s say the average starting balance is <10k, does an investment approach work if you want to trade for a living? No. It’s not possible. Time will destroy you. If you want to take an investment approach, save your money at another job and then enter the market when you can make 10% a year off that equity and live comfortably off of that.

If you are looking to “trade”, then you must not enter the market with an investors approach. Small trade sizes will kill you mentally because your winners will feel inconsequential and you will be tempted to over trade and then time will be your enemy. You will feel like you are able to add to a “trade” to turn it into an investment because “well, my initial size is small so I’m good”.

If it was planned as a trade, it needs to be executed like a trade. Big size, loss defined with risk in line with your account, accept that risk fully, and then get paid when it goes where you think it should go. If it’s planned as an investment, trade small, be willing to add, and don’t expect to get paid until that investment matures in some future time.

Mixing these ideas is highly destructive. Plan your course wisely and then stick to it. Don’t get distracted and tempted to cross those lines. It doesn’t end well.

Have a great week.





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