Trading Vs Investing: Why Trading Wins

by Susan Paige on February 4, 2019 · 0 comments

In the past, financial market participants have taken sides on whether long-term investing is better than short-term trading. This article explains why short-term trading is better than long-term trading.

First, an example. Eddie Lampert is one of the best-known hedge fund managers in the world. As a 25-year-old, he established his own hedge fund, ESL Investments and went on to make billions of dollars. He was known for his accurate calls in a number of companies like AutoZone, AutoNation, and Honeywell among others. Therefore, when he announced that he was buying a stake in Sears Holdings in early 2000s, investors cheered.

Sears was once the biggest retailer in the world. It also owned the Sears Tower, then the tallest building in the world. In 2005, Eddie also engineered the acquisition of Kmart and in 2013, he became the CEO of the combined entity. What Eddie did not know was that the way people shop was changing. Instead of going to the malls, people were opting to shop online. Today, Sears has filed for bankruptcy, making it the biggest mistake in Eddie’s career.

This introduces an interesting lesson in the financial industry, which is that no one can accurately predict the future. No one can claim for sure that a company will continue being a leader in a certain duration of time. For example, the car rental industry has been disrupted by companies like Uber and Lyft. The media industry has been disrupted by the likes of Google and Facebook while the movie rental business has been disrupted by Netflix and Hulu. In addition, previous moat companies like Coca-Cola have seen challenges as more people start being conscious about their health.

As described above, no one can predict what the future will bring. Therefore, buying a stock or any other security and holding it for years is a matter of luck. Luck that the price will continue going up. Another example about the perils of investing is that of Bill Ackman. In 2014, Bill invested in a company known as Valeant Pharmaceuticals when the stock was trading at $150. After climbing to about $250, the stock started to fall. In 2017, Bill exited his investment, making a loss of more than $4 billion.

As a day trader, you can take advantage of the short-term moves in the market. For example, when an asset is in an upward trend, you can buy during the pullbacks and continue making a profit. A good example of this is during the special events such as when companies are reporting their earnings. When a company reports better results, you can buy and ride the bullish wave. When its results are bad, you can easily make money by shorting it.

Trading also allows you to have a peace of mind, especially when you are a trader who doesn’t hold open trades overnight. Since a lot of things happen in overnight trading, the fact is that you are at peace when you are not invested. For example, if you trade crude oil, you will be at peace if there is a major fire in a major refinery. If you are an investor who is short crude oil, you will suffer when the price moves up sharply.

Fourth, being a trader does not need you to have a lot of information about the market. By this, you don’t need to do all the calculations about valuation and other metrics that professional investors look at. Instead, your focus is on the technical and the price action. This saves you time and resources.

Trading is without a doubt better than being a long-term investor especially at a time when most decisions are being taken by algorithms. In fact, one of the best traders in the world, James Simmons who owns Renaissance Technologies has outperformed investors like Warren Buffet for decades.

If you’re interested in starting day trading, risk management tools from easyMarkets give you easy-to-use methods of limiting your risk, whilst trading a range of assets including currencies, commodities and cryptos.

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