Your Investment Horizon is a major factor in the formulation of any investment decisions. When we say Investment Horizon, this refers to the length of time that a trader/investor stays invested in a particular asset.
Not everyone has the luxury of waiting 8-10 years before they can pull out their funds. And not everyone can monitor the market daily to take advantage of short term trade opportunities. As such, one ought to focus on the trade/investment style that perfectly aligns to their Investment Horizon.
For the context of this discussion, we will categorize people who have a long term investment horizon as INVESTORS and people who have the time and interest for short term trading as TRADERS. Of course, you can be both, but it is still imperative to understand the merits and differences between long term investing and short term trading.
Trader or Investor?
Uncertainty is one of the major hurdles that prevent the common person from winning in the market. When a person has no clear plan, he will spend most of the time swinging back and forth between inaction and regret. When the trade plan is not clear, impulsive decisions are made.
To combat this, let's first define what investment horizon fits your lifestyle and align the trade strategies that support it.
Short Term Trading (Days to Weeks)
Short Term Trading is an active style of investment that leverages on the daily fluctuations of the stock market. Short term traders move in and out of the market with a strict rules-based technical strategy. This allows them to buy low and sell high in quick succession whenever opportunity arises.
Pre-Requisites of Trading in the Short Term:
Has the time to monitor the market on a daily basis
Strong understanding of Technical Analysis
Constantly updated with the latest news, press releases and market data
High risk appetite
Short Term Trading carries with it a huge risk. As such, traders need to have a comprehensive plan to curb risk and navigate price action. Short Term Traders understand that losses are inevitable and will prioritize to keep it at a minimum. Small loss, Small Wins, Big Wins. That is the game plan of a risk taking trader. Never allowing a Big Loss so that they can live to trade another day.
Trade Plays applicable on a Short Term Timeframe:
1. Swing Trading: This is done by buying at a valid key support level and selling at immediate resistance. This play heavily analyzes volume and price action to enter when buying pressure is at its strongest and sell when selling pressure kicks in.
2. Bounce Plays: This play uses a combination of technical indicators to enter heavily oversold stocks and make accurate placements to catch the technical rebound. This results to quick profit in a very short amount of time.
3. Scalping: This is an intra-day trade play wherein traders go in an out of high volume stocks with erratic volatility. The use of 1 minute to 3 minute timeframes allows for very accurate entries and exits.
Long Term Investing ( 5 years and above)
Not everyone has the time to monitor the market and trade. For those who have demanding careers and busy schedules, a passive investment fund is the preferred choice.
Long Term Investing is a more relaxed form of investment wherein a fund is placed in an undervalued asset that exhibit strong growth potential.
An Index Fund is usually the investment vehicle of choice as it is a stable asset that has strong and stable long term return. Emerging countries like the Philippines, that is under the Demographic Sweet Spot phase will yield strong returns as it matures with the strong consumer growth of the economy.
Pre-Requisites of Investing in the Long Term:
Has the time to set aside funds for 8-10 years.
Average understanding of technical analysis to implement cost averaging on every major market pullback.
Long Term Investing does not care about daily market volatility. Instead, it invests in the long term growth potential of an asset. This takes several years before it is ripe for the taking. As such, patience and discipline are needed to allow the investment to grow to its realized value.
Investment Plays applicable on a Long Term Timeframe:
1. Cost Averaging: A standard definition for Cost Averaging is the regular positioning of funds in an asset for a fixed duration of time. This is usually utilized by long term investors who can only accommodate minimal investment monitoring. Ideally, a long term investor should implement a market timing component in this strategy wherein funds are only placed whenever the price pulls back to a major support level. This provides substantially higher yield as compared to random fund placements.
2. Value Investing: Value investing is a long term investment strategy that seeks to filter undervalued stocks with high growth potential. This requires heavy fundamental research as certain attributes of the stock company have to be validated to increase the odds of selecting a stock with a good potential return.
For the common investor who cannot actively monitor the market, it is safer to place the capital in an index fund that will ride on the growth of the Philippines economy in a long term horizon.
In a Nutshell
An excerpt from Mark Minervini:
"If you are a short-term trader, recognize that selling a stock for a quick
profit only to watch it go on to double in price is of no real concern to you.
You operate in a particular zone of a stock’s price continuum, and someone
else may operate in a totally different area of the curve. However, if you’re
a longer-term investor, there will be many times when you make a decent
short-term gain only to give it all back in the pursuit of a larger move. The
key is to focus on a particular style, which means sacrificing other styles.
Once you define your style and objectives, it becomes much easier to stick
to a plan and attain success. In time, you will be rewarded for your sacrifice
with your own specialty."
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