Ego is knowing enough to think you are right but not enough to know you are wrong.
Everyone has an opinion on what the differences are between investing and trading. What matters is how this understanding translates into actual results.
Dig deeper, and most will have portfolios that range from a catastrophe to doing well, but there is room for improvement, particularly with updating the techniques you are using.
Those who have been savvy enough over the years to see some decent returns are also aware that their portfolio can be doing so much better.
Financial literacy is not high on the agenda of our schooling system. It is a pandemic that gets little to no mainstream media coverage. So it is down to you to embark on this journey that ultimately ensures you learn to invest safely and retire wealthy.
Once upon a time, the investment game was a playground for the super-rich to become even wealthier. The internet has levelled the playing field. The ability to create life-changing investment portfolios is now open to everyone privileged to live in a country where you have the freedom of choice.
Unfortunately, we still live in a world where war and poverty are still rife and where fundamental human rights are still violated. To be in a position where you can forge out a lifestyle for yourself should not be underestimated.
If people took a moment each day to remind themselves of this, they would inevitably make much more thoughtful decisions.
The pursuit of financial freedom in this modern online space is where it ultimately goes wrong for the vast majority. There are little to no barriers when it comes to opening broker accounts.
There are no rules in place preventing you from funding your account with any sum of money to then blow a hole right through it. There are no regulations in place stopping the devious and the uneducated from setting themselves up as experts.
Ultimately, we live in a time where if you are desperate enough to believe in something that quite clearly has dodgy roots, then there is someone cunning enough to sell it to you and often with no accountability.
I am happy to say this is changing, with several YouTube channels exposing scammers and people talking about their unsavoury experiences. Local authorities are also clamping down on certain unsolicited behaviours and tightening up on rules and regulations.
However, the online trading/investment space is still a murky place, and you have to be extra vigilant when it comes to any decisions you make.
Arguably the most powerful way for everyday people to take control of their money and achieve life-changing wealth, ‘online trading,’ unfortunately, has gained an undeservedly bad reputation.
It is not choosing to online trade that is the issue here, but how people decide to trade usually with greed as the primary driver.
Contrary to what Michael Douglas’s character, Gordon Gekko, says in Wall Street, greed is not good. It is, in fact, awareness in knowing the best way forward for you and then executing a well-thought-out plan with clarity and stealth where the long-term rewards are.
This starts with understanding the differences between trading and investing, then combining the two to create a powerful little-understood modern-day approach to the financial markets for us as busy everyday people. This process is not as complicated as you may think, so let’s break this down.
An investor uses reports and figures, known as fundamental analysis, to make their decisions. A trader uses charts, known as technical analysis, to make their decisions.
An investor holds positions for years through all market conditions with the view of seeing the market go up over the long term. This is a proven approach that delivers ok results, but one that we argue is outdated.
It is a good place to start but certainly not a route you want to stick to. We will be going through this in more detail in future articles.
A trader will hold positions depending on the chart’s timeframe they are using to make their decisions. This is where it starts to go wrong for ‘trading’ as an approach as people often assume trading is just a one-trick pony.
The general and incorrect understanding is that a successful trader needs to be glued to their screen or broker app all day long trying to make money. This is a short-term approach known as day trading and is the choice of the get-rich-quick-schemer.
The idea being the more you trade daily, the more you make, the polar opposite of how to make life-changing returns from the financial markets. The less you do, the more you make is where the profit is.
In this online space we live in, we can subscribe to software charting packages. They give us the flexibility to look at price data on various time frames from 1 second to 1 year.
If trading is defined as using charts to make your investment decisions, you can still trade and still be considered a trader even if you choose to use the higher timeframes.
Using the higher timeframes is what the best traders going back before the internet have done for decades and is known as trend trading or trend following.
Instead of using intraday timeframes – seconds, minutes, hours – as day traders do and inevitably end up losing the lot and more, good traders use the daily, weekly, monthly and even the yearly timeframes to make their decisions.
The lower timeframes are loaded with erratic swings and intraday noise making it very difficult to make any consistent returns. This is in stark contrast to the false promises of day trading as the sexy way to quick riches sold by quack educators.
The higher timeframes absorb all the intraday noise and give a clear direction to the market making price movement over the long term almost predictable. This is where the big moves are and where the long-term trends are, trends that will last months, even years.
Now the misguided will say, well, trends appear on all timeframes’. Let’s look at it another way. A trend, by its very definition, long-term. Good fashion trends last months to years. Bad fashion trends are called fads, come and go and quickly forgotten.
This is the same with trading charts on the lower timeframes. I like to say, the chart you choose to trade on is how long your trading career will last. Ego will often make you believe that you will succeed where many have failed before you.
If that is the case, go ahead. You are very likely to write your own chapter in the book ‘How I lost Everything’ by every day trader that ever lived.
So what is the best approach? It combines using the higher timeframes as a trend trader and holding positions for the long term as an investor.
This is a complete approach for you as a working professional or business owner that requires no compromises. It fits perfectly around your busy lifestyle and delivers the significant, life-changing growth you seek on your hard-earned money.
‘I like the sound of this!’ the savvy investor in you should be saying. So let’s break this down further in the following article.
Note: Moving forward, I will be referring to us as investors and not traders because investing over the long term always holds true regardless of if you choose fundamentals or technicals to make your decisions.
Main Take-Away:
- Lesson 1 – Save at least £10k to £20k to give yourself a solid foundation to build from. This may require sacrifices at first but as you earn more and save more, the balance of the ‘having a life/saving money’ dynamic tilts in your favour.
- Lesson 2 – Looking at charts as a trader does but holding positions for extended periods as an investor does is a complete approach for us as everyday people.