Third in a series: Traders need movement and a buyer!
Traders want a combination of a rising market, price, volume, orders and more buyers. This continues our series on basic investing choices.
Last time we discussed the 3 most conservative investing strategies:
The best and easiest place to start – Income Investing
A solid alternative – Value Investing
More aggressive and demanding – Growth Investing
Today we discuss the most widely used of the aggressive investing strategies: Trading
This discussion is Part 3 of 5 parts of the White Top View series on the big 5 money-making investment choices. Part 1 and 2 are available at the links below:
Trading is not a strategy for beginners
However, even beginners should be aware of trading. Because the more aggressive strategies receive intense media coverage beginner need to know these basics. When you know the basics the media coverage will not mislead you.
New investors should never learn about investing by using a trading strategy. Trading is a high risk approach to the market. That makes it especially dangerous to a new investor’s portfolio.
Trading is not investing
Media stories and wording can leave the impression that trading and investing are the same. Investing means holding positions for a year or longer. In the best case many years. Trading refers to a broad range of shorter term strategies. Traders and even experienced investors can profitably use trading strategies.
The essence of trading is an investor’s belief that a buyer can be found, in the near future, to pay a higher price for a share being purchased today. If that bet is right, the investor profits, if the bet is wrong, a loss results.
A successful trading approach to investing requires knowledge and experience to do well.
Media noise can raise anxiety and cause needless concern
The excitement and noise of trading action attracts much media attention. That intense media coverage and breathless reporting can both impress and mislead the uninformed. That noise can easily be mistaken for real investing information.
General media coverage seldom reports any actually useful investing information. The vast majority of business reporting on markets covers trading action. Fewer reports providing any useful and actionable investing information.
Noisy trading activity can be entertaining, exciting, interesting and even fun. When you understand it you can actually enjoy the racket. It can be quite a circus! And at times it really can be exciting to witness. Unfortunately, it can grossly mislead someone new to investing.
Taking any investment action based on hearing a media report from a noisy trading floor can be a very costly mistake. Approach all market noise with a good measure of skepticism.
In time and usually a short time, it all passes. The media moves on their new “breaking news” and next urgent “exclusive news” item. A quality experienced advisor or mentor can help you separate market racket and trading noise from real investing information.
Good trading strategies in strongly trending markets work very well to produce substantial profits. In up-trending markets, trades are called “long” trades. That means the investor buys or “goes long” on a stock. They expect that the price will continue to rise or trend higher.
The most conservative or basic trading play seeks to identify a stock with a rising price trend. Traders buy in with higher price expectations. At higher risk yet some traders buy even when other investors are not. That can beat the herd but it can also leave them sitting alone in an orphan stock.
That patient approach seeks to find good companies that are expected to trade at higher prices. It can require waiting some months for the price movement to happen. Once a price trend gets underway, the movement can extend over many months.
Most trades of this type take 6 months to 2 years to play out. By far the majority of positions are sold or closed out in under one year.
Traders want 5 market characteristics rising in tandem:
number of buyers
Serious trading action happens when all five market characteristics rise in tandem. At those times traders make their biggest plays.
Like basic trading, this more aggressive trading also needs a favorable or positive market movement. For all trades the trending market serves as the foundation to build the trade on.
Once the market provides a clear and overall market trend and the other characteristics begin rising in tandem, many trading opportunities abound. That opens the door to momentum plays which we discuss next time.
Does learning how to trade appeal to you? Make a comment, ask a question, we can talk about it.
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White Top Investor
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