I was reminded of this thread recently. It is a very confusing thread so I thought I'd try to describe the fundamental differences between trading and investing.
First of all, there seems to be an underlying tone of skepticism that traders can make money at all but I think this reflects a confusion about what it is that traders do.
Trading not only has little to do with investing - they are almost opposites.
For example trading requires constant effort; I'm fairly sure it cannot be done on a part time basis unless you get very lucky. In contrast, investing is about getting your money to grow with the minimum amount of work and effort.
Trading is not about market timing, in the way that "investment gurus" talk about it, and it certainly isn't about any of the sort of "technical analysis" which limerickboy1 suggests in the thread above; no trader is going to sit around for weeks waiting for a two month moving average to cross some threshold. Most traders view this sort of technical analysis (looking for "head-and-shoulders", etc.) as the complete rubbish that it is.
Traders strive to have as little exposure to the markets as possible; ideally a trader will have no position at the end of a session. A trader will have little or no long term exposure to the markets at all while investing is about building up exposure. Of course for a trader to make money in the markets they need to be exposed but generally a trader wants all their money in cash at the end of a session.
Trading involves exposing yourself to zero or very low risk. Successful traders are risk adverse. In contrast, investing involves a trade off between risk and reward (the "efficient frontier") - without risk you get little or no reward. This is why investing only works in the long term - you need to take on risk to get a return but you need a long period to lessen the damaging effects of volatility. Trading is the opposite - the quicker/shorter the market exposure, the better generally.
Trading is tricky and requires study and often computing power; they are competing with their wits against others. Smarter traders will generally do better. On the other hand successful (stock market) investing is the opposite - you are much better off following the most simple-minded strategies - buy the indexes as cheaply (in terms of expenses) as you can with a proportion of your wealth and keep the rest in cash (earning as much deposit interest as you can get). As soon as you try to get fancy, you'll damage your chances of making a return (e.g. by actively managing your equity investments or paying some-one to do it for you or by buying hokey bundled products like tracker bonds and the like).
These days trading has little to do with the bustling mayhem of the open-outcry system or barking orders to brokers on the phone you see in the movies. Most traders spend their time quietly looking at computer screens.
Traders will generally be secretive about what exactly it is they do. If they've discovered an opportunity to make money on the markets, why would they share it? Usually these arbitrage opportunities are fleeting - if the trader is lucky it may last months or years but it would certainly be stupid to tell others about it.
It is not at all fair to quote rates of return from trading as if they were in anyway comparable to the returns available from investing which is one issue I'd have with lamur's posts. When a trader says they make a 80% return each year, they are talking about return on capital, not a compounding rate. You cannot just make 100% one year, "reinvest it" and make double the next year, etc. A trader's return is more like the ratio between a pro poker player's bankroll and their winnings in a year. A poker pro would never claim to have made 1000% return in a year because they made 10 times their bankroll (not at all uncommon for top players) - it's not like they can compound their winnings and make 10 times more again next year and again the year after that or anything even like it and traders are being disingenuous bandying around figures like as it gives the wrong impression entirely.
When they talk of an "edge" in trading, it has nothing to do with qwertyuiop's suggested set of rules in that thread. It goes without saying that traders will avoid the risk of ruin but there's a trivial strategy to achieve the same - don't buy or sell at all. However traders hope to make money on most of their trades so the more trades they can do the better generally.
A trader's edge is generally based on arbitrage opportunity or some timing discrepancy in the markets of some type. For example some traders will spend a huge effort studying some small niche corner of the markets to find some instruments that offer the opportunity to arbitrage. The markets may (or may not) be efficient at the macro level but at the micro level there are plenty of inefficiencies - admittedly many small and difficult to exploit. They will then design a strategy - often using futures and options - to exploit this correlation. The correlation may not last - hence the secrecy around this activity - or the trader may get lucky and be able to milk it for months or even years.
The real point of this post is that the fact that money can be made trading DOES NOT mean that any of the skills or techniques are transferrable to improving your pension fund returns. Trading and investing may seem superficially similar (it may seem like the only difference is the time scale) but they are completely and fundamentally different activities as I hope I've pointed out above.
Successful trading is beyond the layman and to even to attempt it is more likely to result in being wiped out. You are going head to head with specialist trading houses all over the world as well as smart and experienced lone traders; some of your competitors will have 10s or 100s of millions worth of computing power and networks, others will have years of experience in some small dark niche of the markets. Successful investment on the other hand is possible by following relatively simple rules (but I have to say I think the investment guide associated with askaboutmoney is flawed in many ways). It is a grave mistake to confuse the two and try to combine trading and investing.
However it serves no interest to deny that it's possible to make money trading; this is simply not the case.
First of all, there seems to be an underlying tone of skepticism that traders can make money at all but I think this reflects a confusion about what it is that traders do.
Trading not only has little to do with investing - they are almost opposites.
For example trading requires constant effort; I'm fairly sure it cannot be done on a part time basis unless you get very lucky. In contrast, investing is about getting your money to grow with the minimum amount of work and effort.
Trading is not about market timing, in the way that "investment gurus" talk about it, and it certainly isn't about any of the sort of "technical analysis" which limerickboy1 suggests in the thread above; no trader is going to sit around for weeks waiting for a two month moving average to cross some threshold. Most traders view this sort of technical analysis (looking for "head-and-shoulders", etc.) as the complete rubbish that it is.
Traders strive to have as little exposure to the markets as possible; ideally a trader will have no position at the end of a session. A trader will have little or no long term exposure to the markets at all while investing is about building up exposure. Of course for a trader to make money in the markets they need to be exposed but generally a trader wants all their money in cash at the end of a session.
Trading involves exposing yourself to zero or very low risk. Successful traders are risk adverse. In contrast, investing involves a trade off between risk and reward (the "efficient frontier") - without risk you get little or no reward. This is why investing only works in the long term - you need to take on risk to get a return but you need a long period to lessen the damaging effects of volatility. Trading is the opposite - the quicker/shorter the market exposure, the better generally.
Trading is tricky and requires study and often computing power; they are competing with their wits against others. Smarter traders will generally do better. On the other hand successful (stock market) investing is the opposite - you are much better off following the most simple-minded strategies - buy the indexes as cheaply (in terms of expenses) as you can with a proportion of your wealth and keep the rest in cash (earning as much deposit interest as you can get). As soon as you try to get fancy, you'll damage your chances of making a return (e.g. by actively managing your equity investments or paying some-one to do it for you or by buying hokey bundled products like tracker bonds and the like).
These days trading has little to do with the bustling mayhem of the open-outcry system or barking orders to brokers on the phone you see in the movies. Most traders spend their time quietly looking at computer screens.
Traders will generally be secretive about what exactly it is they do. If they've discovered an opportunity to make money on the markets, why would they share it? Usually these arbitrage opportunities are fleeting - if the trader is lucky it may last months or years but it would certainly be stupid to tell others about it.
It is not at all fair to quote rates of return from trading as if they were in anyway comparable to the returns available from investing which is one issue I'd have with lamur's posts. When a trader says they make a 80% return each year, they are talking about return on capital, not a compounding rate. You cannot just make 100% one year, "reinvest it" and make double the next year, etc. A trader's return is more like the ratio between a pro poker player's bankroll and their winnings in a year. A poker pro would never claim to have made 1000% return in a year because they made 10 times their bankroll (not at all uncommon for top players) - it's not like they can compound their winnings and make 10 times more again next year and again the year after that or anything even like it and traders are being disingenuous bandying around figures like as it gives the wrong impression entirely.
When they talk of an "edge" in trading, it has nothing to do with qwertyuiop's suggested set of rules in that thread. It goes without saying that traders will avoid the risk of ruin but there's a trivial strategy to achieve the same - don't buy or sell at all. However traders hope to make money on most of their trades so the more trades they can do the better generally.
A trader's edge is generally based on arbitrage opportunity or some timing discrepancy in the markets of some type. For example some traders will spend a huge effort studying some small niche corner of the markets to find some instruments that offer the opportunity to arbitrage. The markets may (or may not) be efficient at the macro level but at the micro level there are plenty of inefficiencies - admittedly many small and difficult to exploit. They will then design a strategy - often using futures and options - to exploit this correlation. The correlation may not last - hence the secrecy around this activity - or the trader may get lucky and be able to milk it for months or even years.
The real point of this post is that the fact that money can be made trading DOES NOT mean that any of the skills or techniques are transferrable to improving your pension fund returns. Trading and investing may seem superficially similar (it may seem like the only difference is the time scale) but they are completely and fundamentally different activities as I hope I've pointed out above.
Successful trading is beyond the layman and to even to attempt it is more likely to result in being wiped out. You are going head to head with specialist trading houses all over the world as well as smart and experienced lone traders; some of your competitors will have 10s or 100s of millions worth of computing power and networks, others will have years of experience in some small dark niche of the markets. Successful investment on the other hand is possible by following relatively simple rules (but I have to say I think the investment guide associated with askaboutmoney is flawed in many ways). It is a grave mistake to confuse the two and try to combine trading and investing.
However it serves no interest to deny that it's possible to make money trading; this is simply not the case.
