October 07, 2010 at 11:42 am | | Comments 7

Trading vs Investing

trading-multiple-timeframesA recent email exchange with a new subscriber brought forth some important concepts I want to share here on the blog. Among this guy’s comments were the following:

“I’ve decided to take more control of my money and future after investing for several years with a financial advisor.  I’m sitting on a lot of setting up my portfolio should I scale in and out of some core positions in a separate account?  Currently I feel as though I’m under invested, and it sucks to watch undisciplined investors make so much money.  I guess the real question is, should I trade my entire account or should I trade some and invest some?”

During any nonstop rally like we’ve seen from the August lows, this is a natural reaction from a trader who has exercised good discipline.  Sometimes it seems like it would pay better to just be ignorant and chase extended market moves like this one!  Unfortunately though, that’s not an option for anyone who understands the two-sided coin known as risk.

Taking the ‘ignorance is bliss’ mentality may be great on the way up, as every gap higher and afternoon recovery adds to the bottom line.  However, when the tide shifts and the tape gets painted red, it’s a recipe for feeling helpless and stupid for not exiting when the opportunity was there.

The Best of Both Worlds

I’m all for people taking control, because many financial advisors simply want to ‘outperform’ the market rather than make money – the only reason to have money in the market to begin with.

Here’s what I personally do with my money in order to benefit from both the short-term fluctuations and the longer-term trends which occasionally emerge…

I like to diversify my timeframes.  I don’t trade Bandit setups with all my money, but I do direct all my money.  By that I mean nobody else manages it for me.  What I do is devote a chunk of it to my short-term trading.  I want enough of it available there that no buying power issues arise, and so that I’ll have plenty of cash available to put on any trades I like.

I also take a chunk of money to devote to intermediate-term ideas, so these are plays which I like for the next few months but not short-term or long-term.  I’m riding these out with smaller positions, wider stops, and I’ll often exit by way of shorting options against my common.

Finally, I leave money in long-term accounts (retirement accounts) where all I do is trade ETF’s for durations of 6-18 months.  Those long-term plays are simply to have market exposure when I feel a big-picture trend is present which I want to be on board for, but do not want to react to every tick.  For example, earlier this summer I was buying ETF’s for a bounce, and more recently I’ve been reducing exposure there (by selling to raise cash) and getting called out of those trades after selling calls against those positions.

So for me, dividing funds into different timeframes is really helpful.  Also, I maintain separate accounts for these differing timeframes.  That means I don’t login to my day trading account and each time see a 6-18month ETF play I’ve been in for 9 months and get tempted to exit after a 30-minute selloff.  It is a little more to keep up with, but helps me avoid feeling like I have a lot of cash going unused.

Think of day trading with a stopwatch, swing trading with a clock, and position trading with a calendar. Each can be an effective way to watch the time, and they can all be used simultaneously.

If lately you’re feeling underinvested after this market run, you certainly aren’t alone.  It’s a frustrating feeling, but there will be other trends to participate in, and one of these days you’ll be very glad to have cash on hand to put to work.

Any other thoughts?

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

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  1. I’d like to offer a warning to your correspondent: This is not a competition. You chose to be out of the market while it was rising and there’s nothing to do done about that. You want to discover the best plan – for you and your risk/investment goals – to earn money from today into the future.

    Don’t force an investment strategy in an attempt to catch up. You have taken control of your money. Do you believe you have a proven track record that suggests you have the ability to successfully handle that money? Is scaling in and out something you have done successfully, or is it a hope that you can do it? It’s a difficult task.

    Find the trading or investment path that suits you and your experience level.

  2. Mark,

    Your point on not forcing anything to ‘catch up’ is a great reminder that we can’t impose our goals on the market, we have to let it come to us OR adapt to it. There’s no other (effective) way.

    Good stuff Mark, thank you!

  3. Yes!…Treat your Investments & Trading as a business, therefore, manage them as such. It’s your Money, so manage it wisely!

  4. Jeff I wrote this down on a sticky note next to my computer: Think of day trading with a stopwatch, swing trading with a clock, and position trading with a calendar. Very good!

    I was in on the huge moves in the late 90’s that came to a crashing halt early in 2000. Many who lost a lot of money were in the market because they were afraid not to be. Your point I think is well made and that’s to know what your trading goals are and stick with them. Thanks.

  5. Thanks Jerry, I appreciate you stopping by. Having those goals well-defined and visible is a big helper, no question about it!

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