Trading and Investing
Investors invests in underlying assets, uses research and has a long time horizon. Traders, however, work on the margins and trade as a part- or full-time job. Their sweet spot is the short-term move of an underlying security.
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Are you and Investor or a Trader?

Investors invests in underlying assets, uses research and has a long time horizon. In a way, investors are a kind of small business. They see opportunities and put their cash behind them.

Traders, however, work on the margins and trade as a part- or full-time job. Their sweet spot is the short-term move of an underlying security. They use momentum, sentiment and technical analysis, and their business is volume.

As long as the stock's price is performing well, neither the trader, nor the investor has much of a problem. However, when the stock's price starts falling, that's another matter.

The smart trader has an escape plan in place to prevent small loses from becoming big loses. The trader has no emotional attachment to the stock, so getting rid of the loser at a predetermined point is easy.

Trend traders do not try to forecast the market, but instead let the market tell them when to trade and in what direction.

Trend traders wait patiently for prices to tell them a trend has begun. Then they jump on board. If the trend fails, they exit quickly to control losses. Price tells them when to enter and when to exit. If the trend continues, trend traders have no predetermined profit goal. They stay with the trend until it reverses.

Cutting losses quickly and staying with a trend until it ends is how trend traders realize huge profits in the financial markets. The financial markets are trending "about" 80% of the time. That means trend traders are profitable 80% of the time. During the other 20% trend traders keep losses very small so that they are ready when the next trend starts.

Focus on the bigger picture, not just the headlines

One of the best favors a trader can do for themselves is stay appraised of the bigger picture. There are plenty of places where you can get calendars online, and check for the stories that might impact the market. The longer you watch these fundamentals, the more likely you are to be able to distinguish which ones might bring higher volatility and potential trading opportunities.

Avoid developing tunnel vision and focusing only on the things you think could be important. Watch for forecasts and estimates on reports these are just as important as the actual news release and can be key in trying to gauge possible market direction. Good news and bad news are relative to expectations.

How can there be more buyers or sellers at one price?

Isn't there a buyer for every seller and a seller for every buyer?" The answer is yes, but people are forgetting one important thing. There is a bid and an ask (or offer), and only one of them can be traded at a time.

A Bid is an expression of willingness to buy at a price; an ask (or offer) is an expression to sell.

If the ES is trading at 1200.50, the bid is either 1200.25 or 1200.50. The answer depends on which way the market has just traded. Let's make it easy and simply say the ES is between 1200.25 & 1200.50, making the bid 1200.25. In order for the market to move from 1200.25 to 1200.50, someone must pay up to get filled.

You may not be in a hurry and attempt to wait to buy 1200.25, but that will usually only happen when the bid/ask drops to 1200.00 & 1200.25 and you are actually filled on the ask.

If you are trying to buy and really want to get filled, you must pay up at the offer or risk missing the trade. Conversely, if you really want to get filled on a sale, you must hit the bid, or reach down to get filled.

Sure, there is someone on the other side of the trade, but without you choosing to reach up and pay the offer the market stands still. Therefore when trades are executed at the offer it is said to be done by the buyers even though there are sellers at that price taking the other side.

Every buy will be filled on the offer and every sell will be filled on the bid, period.

Let's say we once more have a number of 1200.50 and we see that over time (sometimes just a few seconds) the fills were 100 x 1300. We can say that there were 1200 more buyers than sellers at 1200.50 because of how traders reacted to the bid/ask spread when it was at 1200.25 x 1200.50 and higher at 1200.50 x 1200.75 (called the spread.)

When the market was at the lower spread, 1300 buyers reached UP to pay the 1200.50 offer.

When the market was at the higher spread, 100 sellers reach DOWN to sell the 1200.50 bid.

When the spread traded around this price range there truly were more buyers than sellers at 1200.50.

Understanding bid and ask can open up other realms of technical analysis

There are some traders who will look at the bid and ask order flows to try to get clues to potential movement in the market based on what buyers and sellers are doing. This is often referred to as reading order book flow or depth-of-market.

If you look at the number of orders for each bid and ask around the current market price you can see the probable number of transactions available at those levels.

Reading this information is the key to certain kinds of volume based trading systems and other trading methods that follow the book order flow.


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