There are two types of players in the markets: traders and investors. What is the difference?
Most people are investors. They buy something and hold on. They only know to get on and go up. They have no desire to make money going down. They have no plan to leave the market so when a market reverses direction they are often slow to move. They are comfortable with the idea that Warren Buffett is a buy and holder and cling to that notion even when one of their buys goes from 100 to 1 (like many tech stocks).
Investors seem to have more joy in bonding with the companies they buy and relaying stories at cocktail parties than actually profiting. They fall in love with companies instead of falling in love with making profits. The investor strategy works great in a bull market, but when the bear market appears, investors freeze. They have no plan and lose money fast.
Traders have a plan. Traders are not loyal to anything except profit. They do not care what they own or what they sell as long as they make money. They resist the emotional traps investors fall into by using strict discipline in their decision making. Whereas an investor loves the talking with his broker and passing along stock tips, the trader, specifically the trend following trader, ignores the nonsense and stays focused on the bottom line of profits.
Traders understand risk (unlike investors). They understand how to use risk management (or money management) to enhance profitability in bull and bear markets. When a market explodes up or down, traders use money management to make much more money than investors could imagine. It’s all about winning.
Technical v. Fundamental Analysis
Technical analysis operates on the theory that market prices at any given point in time reflect all known factors affecting supply and demand for a particular market. Consequently, technical analysis focuses not on evaluating those factors directly but on an analysis of market prices themselves, theorizing that a detailed analysis of, among other things, actual daily, weekly and monthly price fluctuations is the most effective means of attempting to capitalize on the future course of price movements. Technical trend following strategies utilize a series of mathematical measurements and calculations designed to monitor market activity to decide when to buy or sell and how much to buy or sell.
In contrast, fundamental analysis is based on the study of factors external to the trading markets which affect the supply and demand of a particular market. Such factors might include weather, government policies, domestic and foreign political and economic events and changing trade prospects. Fundamental analysis theorizes that by monitoring relevant supply and demand factors for a particular market, a state of current or potential disequilibrium of market conditions may be identified before such state has been reflected in the price level of that market. Fundamental analysis assumes that markets are imperfect, that information is not instantaneously assimilated or disseminated and that econometric models can be constructed to generate equilibrium prices which may indicate that current prices are inconsistent with underlying economic conditions and will, accordingly, change in the future. Technical trend followers believe fundamental analysis to be a complete waste of time.
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