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This chapter is from the book

Investor Versus Trader

Do you consider yourself an investor or a trader? Most people think of themselves as investors. However, if you knew that the biggest winners in the markets call themselves traders, wouldn’t you want to know why? Simply put, they don’t invest; they trade.

Investors put their money, or capital, into a market, such as stocks or real estate, under the assumption that the value will always increase over time. As the value increases, so does the person’s “investment.” Investors typically do not have a plan for when their investment value decreases. They usually hold on to their investment, hoping that the value will reverse itself and go back up. Investors typically succeed in bull markets and lose in bear markets.

This is because investors anticipate bear (down) markets with fear and trepidation, and therefore, they are unable to plan how to respond when they start to lose. They choose to “hang tight,” and they continue to lose. They have an idea that a different approach to their losing involves more complicated trading techniques such as “selling short,” of which they know little and don’t care to learn. If the mainstream press continually positions investing as “good” or “safe” and trading as “bad” or “risky,” people are reluctant to align themselves with traders or even seek to understand what trading is about.

A trader has a defined plan or strategy to put capital into a market to achieve a single goal: profit. Traders don’t care what they own or what they sell as long as they end up with more money than they started with. They are not investing in anything. They are trading. It is a critical distinction.

Tom Basso, a longtime trader, has said that a person is a trader whether or not he is actually trading. Some people think they must be in and out of the markets every day to call themselves traders. What makes someone a trader has more to do with his perspective on life more so than making a given trade. For example, a great trader’s perspective includes extreme patience. Like the African lion waiting for days for the right moment to strike its unsuspecting prey, a trend follower can wait weeks or months for the right trade that puts the odds on his side.

Additionally, and ideally, traders go short as often as they go long, enabling them to make money in both up and down markets. However, a majority of traders won’t or can’t go short. They struggle with the concept of making money when a market declines. I hope that after reading Trend Following, the confusion and hesitation associated with making money in down markets, markets that are dropping or crashing, will dissipate.

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