Investor or Trader...
Which Are You?
Most market participants consider themselves to be "investors." But
if you look at a list of the really big winners on Wall
Street, you will see that most of those who make big profits,
list themselves as "traders."
By "big profits" we mean doing better than the S&P
500 Index or Nasdaq 100 Index by a substantial margin over
any three-year period.
"Investors" put their money into stocks, real estate,
etc., under the assumption that over time, the underlying
investment will increase in value, and the investment will
Typically, investors do not have a plan for what to do
if the investment decreases in value. They hold onto the
investment in hopes it will bounce back and again become
Investors anticipate declining markets with fear and anxiety,
but unfortunately, they usually do not plan ahead of time
how they will respond to them. When faced with a declining
(bear) market, they hold their positions and continue to
We all know investors. In many cases it was us before
we realized how dangerous buy-and-hold investing could
be to our savings.
Investors often have some knowledge of trading. But that
knowledge is tainted by how it is all too often described
in the financial press. Trading is risky, dangerous, foolish,
bad, involves a great deal of work, etc. On the other hand "investing" is
good, reliable and safe.
anticipate declining markets with fear and anxiety,
but unfortunately, they usually do not plan ahead
of time how they will respond to them."
Investors had a taste of what buy-and-hold can do to their
capital in the 2000-2002 bear market. They lost again in
the 2008-2009 bear market
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On the other hand "traders" take a proactive approach
to their investing. Traders have a defined plan and invest
with one goal, to put their capital into the markets
They "trade" with a plan that tells them what to do
in any situation. When to enter and when to exit. They
never allow large losses.
Being a trader does not mean you must move in and out
of the markets frequently. This is a common misconception.
A trader simply is one who has a plan for entering and
exiting. They know what to do if their trade goes against
them, and they know what to do when their trade is profitable.
Some traders go short (take bearish positions) as well
as long (bullish) positions. Some are unable to go short,
or they find short positions to be uncomfortable. Probably
the majority of traders do not ever take short positions.
But traders "do" have a plan. This is where they differ
Every Trader Needs A Trend
If you think about it, you will quickly realize every
trader needs a trend to be successful.
No matter what trading method is used, whether it is
pattern trading, swing trading, long term buy-and-hold
investing, fundamental analysis, technical analysis,
buying or selling on news events, IPOs, splits, you name
it. If the stock or mutual fund does not trend in the
required direction after the trade is made, you cannot
This also applies to all asset classes. Stocks, bonds,
currencies, commodities. You must have a trend to profit.
Putting Trader & Trend Together
There are two major camps when it comes to deciding
what method to use to plan a trade. There are those who
follow a fundamental analysis approach and those who
follow a technical analysis approach.
Traders use both methods to "forecast" future market
direction. If combined with an exit strategy, either
can be successful, but debate has raged for 30 years
over which is the most successful strategy, as well as
whether either method truly "outperforms" the markets
Some very astute market players have said that both
fundamental and technical analysis approaches, though
they can be profitable, usually are "no more profitable
than an index fund."
There is a scary thought. All that work when an index
fund could do as well?
is always right. If prices are moving up, the
markets are advancing. Down and the markets are
But there is another approach that is almost never discussed.
Many hugely successful traders use it though the financial
press seldom mentions it. In fact, many who use it are
very quiet about their successes. They do not try to
publicly prove themselves right, they just trade and
This approach is the use of price to determine trends.
Price does not forecast and it does not predict. Price
is always right. If prices are moving up, the markets
are advancing. Down and the markets are declining.
At Fibtimer we are "trend followers." We respond to
what "is" happening instead of predicting or forecasting
what might happen. We "follow" price and allow the changes
in price to tell us "when" to enter or exit a position.
Using price to determine trend does not allow trend
traders to enter at the exact bottom, or to exit at the
exact top. In fact, trend traders do not try to forecast
the market, but instead let the market tell them when
to trade and in what direction.
Trend traders wait patiently for prices to tell them
a trend has begun. Then they jump on board. If the trend
fails, they exit quickly to control losses. Price tells
them when to enter "and" when to exit. If the trend continues,
trend traders have no predetermined profit goal. They
stay with the trend until it reverses.
Cutting losses quickly and staying with a trend until
it ends is how trend traders realize huge profits in
the financial markets. The financial markets are trending "about" 80%
of the time. That means trend traders are profitable
80% of the time. During the other 20% trend traders keep
losses very small so that they are ready when the next
This does not mean 80% of their trades are winners,
just that they are in the plus column for that 80%. If
you have three losing trades of 2% and one winning trade
of 18% in a year, you finish with a 12% gain, even though
most trades were losers. This fits the old saying, "cut
your losses short and let your winners run."
Remember that "price" is determined by millions of investors
By using price, trend traders take advantage of the
combined wisdom of millions of investors and traders
to trade a successful and profitable market timing strategy.
Yes, it takes patience to be a successful trend trader.
Yes, it takes discipline to follow the strategy and make
the trades, which many times go against the prevailing
wisdom. This is true of "all" winning market strategies.
But trend traders who use price to determine trends have
been quietly "beating" the markets for many years. They
will quietly continue to do so for many more.
Recent articles from the Fibtimer market timing services;
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.