So I was watching Cramer’s Fast Money last night, as I do time to time, and he reminded me of an old trading axiom.
One that is carved into my personal trading rules that I felt I should elaborate upon.
Don’t turn a trade into an investment.
The inverse holds true…do
So what do I mean?
The very first post I made on this blog was an article entitled “Investing vs. Trading: A Tale Of Two Cities“. The point of that post was to differentiate trading versus investing.
This article is more aimed at the traders out there. I’m defining traders here as those who buy stocks, options (and any other asset vehicles) with the intention of holding onto them for a short period. A short period with an intended direction.
Let’s run through an example. Dave wants to ‘trade’ $TSLA equity. The stock closed at $344 and he thinks it sees a $10 swing tomorrow, meaning he’s looking for the stock to hit $354.
Dave buys shares at $344 when the market opens. At first it rolls up and he is getting pumped up.
Suddenly news hits and the stock goes against him. Suddenly the stock is trading $343. $342.
It keeps going down, but he has faith in it. So he holds onto it and the stock closes at $340. “Ehhh…340 isn’t so bad it’ll bounce tomorrow.”
The thing is that there is no guarantee that it will.
Many traders get emotionally attached to their trades. It was their decision, so it had to be the right one. But even the best traders make mistakes.
Accepting those mistakes is what this whole not turning a trade into an investment means.
If you entered a position with the intention of it being a quick swing looking purely for short-term gains, then make sure it remains a quick swing…and take your short-term losses early. Holding onto your quick swing trade changes it from a trade into an investment…and if trading is your goal, don’t let them happen. I’ve seen it happen to others and I’ve seen it happen to myself (though I’ve learned from my. Mistakes and rarely let it happen now). It’s a GREAT way to lose money.
Now on the contrary, if you’re investing in a name. You should disregard little swings here and there. As an ‘investor’, you are in it for the long haul and even if the stock dips on news and ER, the stocks you invest in should be those where such things don’t matter.
Today In History: The classic tale Moby Dick was published. At first it was a massive failure. Then things changed. Don’t lose faith in your abilities to trade or invest…learn from your mistakes. Almost all good things take time.