Opinions expressed by Entrepreneur the collaborators are his.
Investment and trade are two proven means of trying to make a profit by participating in various financial markets. Most people consider themselves an investor and tend to have an aversion to the “trader” label, even though, in reality, some of the investors who identify with themselves are, in fact, traders. These people are unaware that some of the biggest winners in the financial markets are considered traders.
In general terms, investors look for more significant returns over longer periods of time by buying and holding assets. They put capital into their select markets under the assumption that the value of their investments will increase over an extended period. As the value of the assets in which you invest increases, so does the value of your investment.
Related: Why Investors Shouldn’t Just “Buy and Hold”
The difference between investors and traders
Because of their long-term mindset, investors typically do not have a plan for when their investments decline in value. They maintain their investment in the hope that, over time, their value will eventually reverse and continue on their upward trajectory. This is because investors anticipate bearish markets with trepidation and do not plan how to respond when they are losing. When prices fall, investors tend to continue to hold their positions.
In contrast, traders take advantage of both up and down markets to get in and out of positions in shorter periods of time, making smaller profits more often. As such, they have a somewhat negative reputation among innovators and investors. It is not uncommon for traders to be called “greedy” or “murderers of innovation.” However, the truth is that traders are some of the bravest and most disciplined players in the financial markets.
A trader has a defined course of action or strategy for putting capital into a market with one goal: to make a profit. Traders don’t care about the assets they trade. All they care about is analyzing trends to find an opportunity, so they end up with more money than they started. In a perfect world, traders would want to go short as often as long, allowing them to profit in both the up and down markets. However, like investors, most traders prefer not to fall short, as they struggle with the concept of making money while there are falls in the financial markets.
Related: Learn business strategies to grow your wealth
Fundamental analysis and technical analysis
There are two basic premises of trade: fundamental analysis and technical analysis. Fundamental analysis studies the externalities that can affect the supply and demand of a given market, such as government policies, domestic and foreign political or economic events, and more. For key analysts, they believe it is possible to predict changes in market conditions before they are reflected in market prices by examining these external factors.
On the other hand, technical analysis is based on the belief that market prices reflect known factors that affect the supply and demand of any particular market at a given time. It is a broad area that uses price and price-related data to determine when to buy and sell. Technical analysis tries to save the problems that fundamental analysis has on the specificities of time and risk. Technical analysts believe that a careful analysis of price action is enough to capitalize on trends. A technical analyst can analyze charts for any market and market them successfully without understanding them.
There are two types of technical analysts in the financial markets. One type “guesses” the direction of the market through its ability to read charts and use indicators. The other type of technical analyst neither predicts nor predicts market direction. They are known as trend followers.
Instead of predicting the direction of a market, trend followers react to market movements whenever they occur. They respond to what has happened instead of anticipating what will happen and trying to outperform the market. Trend followers keep their strategies based on statistically validated trading rules, allowing them to focus on the market without letting their emotions interfere.
We have established the difference between being an investor and a trader. We have gone a step further in defining the two main theories behind trade: fundamental analysis and technical analysis. There is one more distinction for traders: traders can be discretionary or mechanical.
Discretionary vs. mechanical traders
Discretionary traders make their buying and selling decisions based on the sum of their market knowledge, their view of current market conditions or other factors. In other words, they use their discretion to make their business decisions, and as a result, their choices may be subject to behavioral biases.
In contrast, mechanical traders practice a much more disciplined investment process. They never use their discretion when making business decisions. Their decisions are based on an objective and automated set of rules derived from their market philosophy. Mechanical trading systems simplify life by eliminating the emotions of business decisions, forcing traders to abide by the rules.
Related: What kind of marketer are you? An introduction to business behaviors
Recent years have seen enormous political and economic changes. At the same time, technology has made immense advances that have brought about significant changes in the trade and investment industry. For people interested in entering the financial markets it is very important to discern which strategies work best for them and to exercise them with discipline.