Friday, March 5, 2010

Investor vs Trader

So I got the Technical Analysis book and I read something interesting that I wanted to share as it is something I struggle with in my trades:

"You Cannot time your financial decisions with fundamental analysis, so forget about price-to-earnings ratios, cash flow and dividends right now if you want to succeed as a trader. Technical analysis allows you to objectively measure supply and demand at work in the market to gain an edge and then determine what might be next for the shor-term trend of the stock."

What I got out of this is when you are making short term trades the fundementals have very little bearing over the short term. This is not to say that the fundamental's do not matter, but for trades they probably should not drive your trade ideas. But there are fundamental catalyst that a technician should take note of like earnings for example. Technical analysis is a great timing tool and lets face it fundemental analysis just does not help you time your trade. So I kind of fill that I need to have two seperate approaches when looking at investments vs trades.

With trades I think it is more prudent to use technical analysis as the basis for your decision making but still acknowledging pending fundamental catalyst. Because I think that in reality when you bring fundamental analysis into the analysis of a short term trade, I think you are just trying to find reasons to further justify your position whether they are relevant or not. I will be the first to admit that I am guilty of such acts and really I was not aware of it until I read that one little paragraph in the introductory chapter of this book.

With Investments I think more the bulk of your analysis should emphasis the fundamentals of the business. But I do think that the charts should be consulted to help time entries and exits even on a longer time frame.

Jason, you mentioned this before about possibly needed a separate account for trades vs investments. I actually think that is a great idea as I think I have decided that I want my IB account to be entirely dedicated to trading and will save my 401k for the investments. I will outline this in my business plan and will share with you guys when I am finished, and would love to hear feedback.

1 comment:

  1. I came across a quote in the book I am reading that I think we have all come to appreciate.

    "It is better to be in cash wishing you were in stock than it is to be in stock wishing you were in cash"