April 18, 2006 at 1:36 pm | | Comments 4

Check Your Rolex

There are traders and there are investors. To me, the primary difference is the timeframe you operate on.

One of Stephen Covey’s 7 Habits of Highly Successful People is to “begin with the end in mind.” This is a key element of planning a trade (or investment), as only knowing your timeframe will allow you to accurately evaluate your position. Covey goes on to provide some great advice, which can certainly be applied to trading…

“To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now so that the steps you take are always in the right direction.”

Deciding what kind of trader you should be depends on your timeframe as much as it does your personality. What kinds of trades do you prefer to take? Have you determined which trading strategies are right for you? Buying pullbacks within an uptrend? Short selling stocks on low-volume rallies right up to resistance? Or are you a buy-and-hope hold investor looking to be the next Warren Buffett? Your timeframe is the deciding factor.

Investors will often include fundamental data in their trading strategy and execution plan, knowing that the performance of the business behind the stock they own can have an impact on how the stock moves over time. Such an impact is not usually very quick (unless it’s earnings season), and as a result, investors know that their timeframe must be long enough to allow their fundamental thesis to pan out.

I’m a trader, and to me, short-term price action is more about supply and demand than the fundamentals of a company whose stock I’m trading. Business doesn’t usually pick up or fall off overnight…it takes many weeks and months and years. My trading timeframe ranges between several hours up to a couple of weeks. This normally excludes almost any fundamental impact on the stocks, because I’m swing trading the supply and demand shifts.

So whether you’re just starting out in the market and selecting a trading style that suits your needs, or if you’re already a trader or investor who is evaluating what to do next, be sure to examine your operating timeframe. If you have long-term ideas based on company-specific data, your investment timeframe should allow your fundamental ideas to prove themselves. On the other hand, if you’re looking to compound your money quickly and eliminate as much risk as possible, then a swing trading strategy may be better for you. The most important thing is to know your timeframe before you put cash to work, because only then will you be able to fairly evaluate if your stock should be kept or sold.

Jeff White
President, The Stock Bandit, Inc.

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