Over a year ago, I wrote an article sharing with new readers primarily, my own understanding of various terms like investor, trader, speculator, etc. - http://fusioninvestor.blogspot.com/2007/05/master-and-novice-investor-trader.html The main point in that article is actually a simple one - regardless of investing style (or profession), there will be novices at one extreme, and serious professionals and Masters at the other extreme. After all, we know there are good badminton players vs lousy one, good tennis players vs lousy ones, etc. so, why can’t there be good investors vs lousy ones, good traders vs lousy ones, good speculators vs lousy ones as well?
However, you may be surprised to hear that there is still much confusion about traders around in the real world as well as within the Net.
Let me give you a few examples.
“Traders only earn a few hundred bucks a month, if any”.
“Traders lose money in the long run” (this one is obviously a generalization).
“Traders change their minds all the time”.
“Traders always chase after hot stocks and likes volatility”.
“Traders only play speculative stocks and avoid fundamentally sound stocks”.
“Traders use charts only”
And so forth. (You're welcome to share your favorite generalization here :-) )
Whilst containing some truths in each one of them, are any one of the above statements necessarily true for all traders? Are all traders the same? Obviously, when phrased in this manner, I’m sure nearly everyone – if they pause and think for a while – will say of course not.
Yet we continue to hear such statements being made all the time. I suppose this is inevitable. As human beings, we like to simplify things, and so, we generalize. It’s easier to have one rule, than to keep many complex rules in mind. However, we must also understand that when we generalize – if left unchecked - it can progress to become a strong bias, prejudice or stereotyping, which if continues to be left unchecked, could lead to discrimination, racism and even fanaticism, before we even realize this in ourselves.
Are all traders the same?
Are all Policeman the same?
Are all politicians the same?
Are all Malays (or Chinese or Indians or Ibans or Kadazans) the same?
Are all Jews the same?
Food for thought? :-)
Anyway, since this is mainly an investment blog, let’s talk a little bit more about the topic – are all Traders the same?
In such an instance, it might be easier if we approach the question from another angle. For example, let’s ask the question – how are Traders different from one another? Yes, let’s ass-u-me for a moment that the statement is incorrect and ask “how can Traders be different from one another”.
Interestingly, when you start to think in this manner, you’ll discover that there are actually, many, many, many differences between Traders.
For example, you may point out to difference in general skill level per my previous article, i.e. Master vs Novice Traders.
But is that all? Is this all there is?
What about “Entry Rules” – can they not have different types of Entry rules? (e.g. buy on breakout, buy on pullback, buy on impulse, etc.)
What about “Exit Rules” – can they not have different types too? (e.g. sell on breakout, sell on strength, sell on stops, etc.)
What about “Position Sizing Rules” – can they not have different types too? (e.g. % of capital, % risk, etc.)
What about “Starting Capital”?
Expected Returns (5%? 10%? 20%? 50%? 100%?)
Acceptable Drawdowns (5% capital? 10%? 50%? 80%?)
Types of markets traded? (stocks, futures, options, forex, Bursa, Hang Seng, overseas, etc.)
Execution methods (Telephone? Internet, Direct Access, Retailer, Funds, etc.)?
Trading tools? (Stock data, business information, charts, etc.)
Time-frame? (yearly, monthly, weekly, daily, hourly, 10 minutes?)
Turnover? (10%, 100%, 1000% per annum)
In short, can they not have different Trading systems, different Trading plans, different Trading strategy, approach, objectives, etc.?
And what about the difference between an “Investor” and a Trader? If someone is a successful Investor who hold stocks for many years and almost never sell, is this person necessarily different from a “Trader” with a monthly or even yearly time-frame who also happens to own stocks for many years?
Or what about the generalization that “All Traders use charts for entry and exits”.
Is this true 100% of the time?
Can a Trader not use chart but buy and sell using Fundamental criteria such as P/E range? Or use speculative criteria such as expectations of underlying factors that will impact earnings in a major manner? (see my previous article on Speculator). Or some other criteria?
I believe one can be a Trader without using the standard Price / Volume charts, although in my opinion, it is not optimal. It would be like trying to screw something using a manual screwdriver, instead of an electric one. It can be done, but this is not what professionals use every day when building or renovating houses.
A related question to the above is - is there just one optimal way of investing or trading?
But this would make this article even longer.
So, let me stop here, and wish you "Happy thinking".