For some people trading is a business and for others it is more a game. People want to earn or to win. Both groups may have different motivations, but the numbers should go only one way – up.
There are different markets, stocks and options, Forex and futures, just to name the main ones. The interesting thing about stocks is the inherently built in secure money management. A stock can’t fall into negative territory, but it can multiply by a huge factor.
If stocks are traded with a cash account, this holds true in a guaranteed sense – the account can’t go below zero. Future or Forex accounts can and require terrible margin payments then.
So, the answer for both, the business woman and the gaming addict, which market should be traded is in short, the stock market. If done right, which means without using margin, the mathematics play in your favor.
The trading system – is it necessary? Short answer again, yes it is. Gut trading is fine, as long as there is at least a subliminally anchored basic system of rules to which you adhere. Two things come to mind very quickly.
For one and again, money management. Do this wrong and you are fighting an uphill battle. The second one is the stop loss. A trader uses a stop loss, otherwise he is no trader but an investor. Period.
The investor can’t have a trading system. He may, however, have an investing or investment system, but that is a different story. The big difference of investors and traders regarding the system is that the former uses no stop loss and the latter does.
You are an investor and you use the stop loss method? Well, I can assure you, with using a stop loss you are no real investor, you are only a hybrid trading investor or investing trader. And with that approach you are positioning yourself exactly in the mid of two chairs, aka you are going to land on your bum.
Either you want to buy cheap, cheaper, cheapest, and the lower the price goes, the better is the buying chance, or you want to buy high and if the price falls back, something is wrong.
It all depends on your system. For investors that are buying cheap, holding through extended periods of even lower prices is the right thing to do. That is the basic investment system.
For traders things are turned upside down. Buying high is the start, assuming an increasing price comes next. If the price increase doesn’t come, something is wrong according to the basic doctrine of this system and the stop loss has to be executed.
So, as some sort of conclusion, because it is of utter importance, mixing the systems of investors and traders leads to failure.
This is the eternal and simple wisdom of the financial markets and it is true not only for stocks but also for all other playgrounds of traders and investors.
And no, just because investing and futures or Forex may be a contradiction in itself, does not invalidate the simple difference of trading and investing system basics. If anything, it just means that investing works only in the stock market, while trading could also work with Forex and futures.
Trading other things than stocks is just more difficult and the percentage of traders leaving the game as losers is higher. Some talk of 95% for the futures markets and 99% for Forex. In stocks it is said to be less than 90%.
Interestingly most people feel the opposite is true and believe there is a magic trading formula and they are among the few who know it. But alas, reality looks different for the majority.
Ah – that is a motivating way to start a stock system site 😉