Most people have some of their money invested in financial markets - even if they don't have their own personal trading accounts they may well have pension schemes (personal or company) or other investments. The chances are that this money is invested in financial instruments like stocks and bonds and is managed by a professional money manager, somewhere down the line.
Generally this money is invested over long periods and remains invested - regardless of the market and economic conditions in play.
Money invested for long periods is susceptible to market crash and its value can vary greatly from market peak to trough. Stock markets are currently trading some way below the levels they were trading 12 years ago at the height of the tech. boom. The S&P 500 peaked in the year 2000 near the 1500 level. This is has high as the market has ever been, especially when we take into account inflation. As I write (June 2012) the S&P 500 is trading near 1250, still some way below the peak. However, in the last 12 years the US dollar, due to inflation has lost around 33% of its purchasing power. If we take this into account the market is trading at, inflation adjusted, level of 825. So the market has actually lost almost half of its value in 12 years.
Inflation and market fluctuations create enormous obstacles for the long term investor - even if their investments attract additional income from interest or dividends.
There is an alternative way to trade. We can take short-term positions in the market trading in and out taking advantage of short-term movements in price. This avoids holding positions during market crashes, which not only reduce the value of our investments but also have tremendous psychological impact on some investors - particularly those planning retirement before the market crash. In addition we can trade short - making profits from price declines.
There are many styles of trading other than buy and hold. The term trader is a generic term and is akin to referring to a football player as a sportsman. Some of the common trading styles are as follows:
Position Trader A trader who analyses price charts and makes entry and exit decisions based on this analysis. This type of trader may also trade using fundamental information to support their thinking - for example they may consider the company's overall market prospects. They will plan their trades and have strict exit conditions if the trade does not workout as planned. They may hold their positions for months or years but they do not simply buy and hold.
Swing Trader A swing trader will use similar technical charts to plan trades and make entry and exit decisions. The swing trader will hold positions for much shorter periods - days or weeks. Because the trading span is short the swing trader will pay less attention to the fundamentals of the market to be traded and will rely almost 100% on the use of price charts.
Day Trader A day trader will open and close all of their positions within the course of one trading day. The day trader is risk averse and will be unlikely to take positions overnight due to the possibility of market condition changes. The day trader will use technical charts to trade but will use short time frame charts (intra day charts) to make buy & sell decisions. The day trader must be experienced since they have little or no time to make trading decisions due to the time frame of their trades.
Scalper A scalper will make trades that last minutes or even seconds. The scalper looks to shave off profits from minor changes in price that last for very short periods of time. The length of trade makes this type of trading almost impossible for manual trading. Therefore, scalpers will generally rely on trading computer programmes to open and close trades based on some pre-tested logic.
Shorter term trading is based on price charts; this is sometimes referred to as technical trading. Most professional money managers take a different approach looking at the fundamentals of an asset. For example, the assessment of a stock might include an analysis of future prospective earnings, dividend yields, price to earnings ratios, etc. The manager will look to balance growth prospects with other income from the asset (like dividends) to control risk while bringing asset growth. The problem with this approach is not only the inflation head wind but the risk that market shocks will sink all boats - also referred to as systematic risk. The movement of stock prices are not necessarily linked to the fortunes of the underlying company. Often events that have no relationship to a company's market or earnings potential will result in the stock price falling.
Technical trading styles generally put little emphasis on the fundamentals of a market. Technical trading focuses on the actual prices movement and what is likely to happen next. The markets are a psychological battle ground of competing traders. Trader emotions move from feelings of elation to waves of sheer panic. These moves can prove to be profitable for the skilled trader.
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