- The Market
- Winning and Losing
- Investor v. Trader: How Do You See the World?
- Fundamental v. Technical: What Kind of Trader Are You?
- Discretionary v. Mechanical: How Do You Decide?
- Has Trend Following Changed?
- Trend Following Modus Operandi: Follow Price
- Follow the Trend
- Handling Losses
- Key Points
Investor v. Trader: How Do You See the World?
Do you consider yourself an investor or a trader? Most people think of themselves as investors. However, if you knew that big 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, like stocks or real estate, under the assumption that the value of the entity they invest in will 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 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.
Nothing has changed during the 21 years we've been managing money. Government regulation and intervention have been, are, and will continue to be present for as long as society needs rules by which to live. Today's governmental intervention or decree is tomorrow's opportunity. For example, governments often act in the same way that cartels act. Easily the most dominant and effective cartel has been OPEC, and even OPEC has been unable to create an ideal world from the standpoint of pricing its product. Free markets will always find their own means of price discovery.
This is because investors anticipate bear, or down, markets with fear and trepidation and therefore are unable to plan how to respond when they're losing. They chose to "hang tight," so they continue to lose. They have some idea that a different approach to losing involves more complicated trading transactions like "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, as opposed to investing, is all about.
A trader has a defined plan or strategy to put capital into a market in order 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 out with. They are not investing in anything. They are trading. It is an important distinction.
Tom Basso, a longtime trend follower, has often said that a person is a trader whether or not they are actually trading. Some people think they must be in and out of the markets every day to call themselves a trader. What makes someone a trader has more to do with their perspective on life than with making a given trade. For example, a trend follower's perspective includes 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 a trend.
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 resemble investors in that they struggle with the concept of making money when a market declines. We hope that after reading Trend Following, the confusion and hesitation associated with making money in down markets will dissipate.
Trend followers are traders, so we generally use the word "trader" instead of "investor" throughout.