I’ve talked about matching personality to trading style before in a previous video ‘What has Personality got to do with Trading?’
It’s best to start off by acknowledging that everyone loves the idea of being dead certain of getting things right, and that includes trading. The one that is going to deliver the windfall that makes a significant difference to our account, or that provides solid and easy to obtain profits.
So is low risk, high return trading actually possible? Can we cope with changing into high return, high risk trading? This is what we all need to be able to answer honesty before establishing our trading strategy as it is a significant determiner of what methodology and style of trading we ultimately stick with.
There’s an abundance of methods for trading or strategies that we can apply, but if we can’t cope with the risk that comes with that strategy, then we need to seriously reconsider.
Trading requires a clear head and an ability to detach from our emotions. So if we’re unable to cope with uncertainty or risking capital, then maybe we need to consider long-term investments only.
Personally I do both, and long term investing forms the bulk of my portfolio as it allows for the consideration of all aspects of the stock, the market, the sector and we can afford to take time to do more analysis than when we are a short-term trader. Fundamentally stocks will go up in the long-term provided we have done our homework and chosen strong, stable and growing companies with great management.
As a short-term trader, we need to be able to make decisions quicker and with less information at our finger tips. We need to be ready to react to the market and be prepared to have greater probabilities of potential loss.
This is because the nature of short-term trading is to cash in on quick market movements, so the chance of it going against you is relatively high, even if we have identified a great opportunity with minimal risk. So if the masses don’t go the way we expected, we will likely face a loss even if we have applied sensible risk management.
To some, risk can be invigorating. For me though, I prefer to eliminate risk as much as possible. What about you when it comes to taking risks?
Many thrive on the adrenaline of short-term trading and the associated risks, but it has to be something that truly makes your mind focus and gets your energy levels up in a positive way.
Getting into short-term trading if you really can’t cope with the idea of losing money, or need to ensure your money is safe for the long-term is a serious error. You will become frightened, stressed and nervous very quickly, leading to serious trading errors.
So you need to be honest with yourself. What type of trader are you? There is no shame in being a long-term investor. Just look at the results of Warren Buffett.
Trading styles vary. There are many shades of grey within the categories of ‘short-term trader’ and ‘long-term trader’.
Our job is to work out honestly where we fit on the spectrum of coping with risk and the whole trading game. Then establish ourselves with a commitment to work the markets as best we can with realistic expectations. This is what leads to the success you are after.