Sunday, October 28, 2007

Stock Trading or Stock Investing

As I study the markets daily, I find a unique trade or see a stock that looks beautiful, technically, on one of my numerous monitors. Occasionally, I find myself curious how a Warren Buffet, or some other master in the market, would view it. I then tell myself it is irrelevant; our style of capitalizing off the markets is completely contradistinctive to Mr. Buffet and most investors. One of the many lessons and rules of playing the markets is to comply with your technique. At Elite Trading & Speculation our style has more of a characteristic of a trader. On the contrary to many opinions on trading, we find this trait to have such a great paramount over the classic buy and hold strategy. I am not completely opposed to this casual technique of buy and hold, but I have found short term trading to be superior in allowing us to manage risk and returns. With recent market volatility and short term trading in general, this technique has become more interesting and admirable to the novice and retail investor. First, let us remember how the classic investing technique works in general. A buy and hold portfolio needs to be diversified; this helps control risk and helps maintain the portfolio through market cycles. The portfolio should contain quality stocks and dividend paying stocks. Speculation is usually not included in a classic portfolio; however more aggressive investors do have a percentage of their portfolio in speculation, but a very small percentage. Fundamentals of each stock are very important. Most classic investors base 100% of their decision on fundamentals and ignore the technicals of the charts, although technical techniques do exist on the long term view and prove to be very effective if followed. The more advanced investor usually utilizes options and hedging techniques to manage risk, however the novice and retail investor lack knowledge in these techniques, therefore they leave this risk controlling variable out of their investment plan. The long term investor does and must trade, but they do this on a longer term basis. Once a component of their portfolio makes a great return over a long period of time the investor will either take some profits by selling a percentage of the position or swap into another stock. There are many more variables that go into classic investing, but by going through it generally will tell us this technique can work; history also tells us this technique works successfully from famous investing gurus. This technique may work well and satisfy many market players, but may put many retail and novice investors obliviously at a disadvantage. One con is the amount of capital it may take to realize gains. Starting out with little capital can be frustrating especially when the market is in a bearish mode for a lengthy period. Most classic investors do not play the market in every aspect. They usually lack the knowledge of or find it highly risky shorting stocks. When the market makes a huge correction, it always scares off a big percentage of classic investors out of the market indefinitely; although the correction could have been used as a huge buying opportunity and inevitably the market does go back up after a correction. If they would overcome their fears and hold their positions, they would go back up in parallel with more gains from new positions bought in the lows. The physiological effects are hard to bear for some when a considerable amount of an investor's capital is lost. A retail or novice investor, working a classic day job watching the market on a casual basis, may lack discipline. This does not mean investing or trading cannot be done part time, but many casual players become torpid as time goes by. This is a huge set up for complete failure. Why do we use the edge of a short term trader here at Elite Trading and Speculation? We find numerous advantages, on top of the fact that the markets are a passion of ours wanting to be actively involved in them full time. We hold positions for periods ranging from intraday to 3months. Although we are short term traders, we still have long term outlooks on stocks as well as long term price targets. For example, we have had a long term outlook on Google since December of 2005. We have not bought and held our position, but rather traded around it since 2005. Let's compare our gains based on a $25,000.00 investment, to gains that would have been made if we just bought and held our position.

Our entry price was $412.50 in December of 2005. Go to our website to view a chart of entry and exit points in Google. Our rough average of holding a position is a little over 2 months. At today's current prices, by trading the position with $25,000.00 we have a gain of $32,899.00 a 76% return. If we would have bought and held using the classic buy and hold technique; selling around today's levels we would be sitting on a gain of $15,450.00 a 62% return. This only shows that trading can have a superior advantage if executed correctly! At the same time of capitalizing on this stock, we have controlled our risk. How have we controlled our risk? First of all, we constantly research the up to date fundamentals, news, the streets outlook, and conference calls. All these variables shows us our long term outlook, but one of our most important tools that we use for the short term entry and exiting points is the chart technical's. If there was to be a turn in the outlook at any point we could have quickly closed out our position, and waited for a pull back on the charts and at that point reevaluate the stock. The saying is a trader is always on the edge worried and stressed, but on the contrary I feel more comfortable knowing I am on top of my research and if the markets turned I could quickly turn with them and profit from the downside. If we would have shorted this stock on the pullbacks we would have almost doubled our gain. Diversification in trading is not an important variable. If technology is working at the present time, that is what we put to work. If the market cycle changes we could quickly reposition into new stocks that do well in that type of cycle. In doing this, your full portfolio is always working for you; as opposed to classic investing diversification is what keeps you a float; when one part of your portfolio is not working the part that is working helps you stay in the game. One could have debated years ago that trading is not worth it due to brokerage fees. That debate is obsolete today with discount brokerage firms such as E-trade, Trade Station, and so on. These firms provide trading at deep discount fees. One could have also debated years ago that you would need a professional to trade the markets, and you would need to be in the trading pits all day. Today with the internet we can make trades at lightning speeds, and as far as information goes that is also delivered today at lightning speeds through the internet. Not to mention CNBC, and Bloomberg Television, these networks provide a great wealth of information, debates, interviews, and breaking news. Benefiting from options is also a advantage to a short term trader. There are numerous complex and also fairly simple strategies to insuring your short term positions. This is a general overview of investing and trading; we could study the technique of trading, investing, and the markets for many life times. Bottom line, the two forms of capitalizing off the markets described here will work; it is up to you to find your niche and what works best for you. Once you discover your style, study it and execute it with passion. If you would like more knowledge and guidance on trading go to our website. We will prosper step by step trade by trade.

1 comment:

Anonymous said...

Above Article published by
Elite Trading & Speculation