A trader is always different from an investor in every aspect. Therefore, they have to deal with the market in very different manner. We are not saying that a person can’t be part of both the games. But always remember the game of cricket. There are different strategies for each format of the game i.e. Test Match, One Day Match & Twenty-Twenty. So, you need to identify yourself that what kind of game you are going to play. You can become a day trader, short term investor or long term investor. There are different strategies for each of the style of making money through financial markets. Infact, you can keep two separate accounts for trading & investment; but, don’t try to mix the same. Following are the major differences between the two:
- A trader just wants the stock to move in either direction i.e. up or down. If a stock is stuck at a level or it opened gap up or gap down and stays there, it will not be a good stock for a trader. If a stock is opened gap up/down 2% and it extends its move to 5%, trader has the opportunity to make money. Whereas an investor is worried about long term growth, earnings and fundamentals etc. An investor does a lot of research before putting their money into any stock. They are concerned about sectoral growth, Government policies, interest rate regulations, inflation number and so on… A wrong decision for an investor may persuade him to re-asses all his investments but wrong decision for a trader is another bad trade and losing a couple of bucks.
- A trader is worried about what will happen to the stock in next few hours or minutes. If you look at the chart given below; a trader may have made good amount of money in the stock when it was ranging from Rs.7 to Rs.12, but actual move started when it broke out of the range and had a big move from Rs.12 to Rs.35.
Nifty Feb Call- 2850
If you are afraid to create a position in this kind of move you will never be able make good amount of money as a trader. Because even if you are late entrant may be around Rs.20, you could have made Rs.10 per share at least. Whereas, an investor is worried about the growth of the company in the months & years to come. They look at the stock when the stock is already taken a move. Market discounts everything. A stock may over-react to a rumor in the market but it will adjust the price when the actual news will come out. So it is rightly said that:
“Buy rumors sell news.”
- Traders have the ability to read the order flow and capture the spread of a stock. Traders and investors both conduct research to make money through equity markets. But, the style and technique of their research are head and tails of a coin. As we all know an investor conduct macro & micro economic analysis, industry analysis, cyclical trends and various valuations. Whereas a trader conduct chart study, read the order flow, determine the trend of the stock and identify support & resistance levels. Traders are more aggressive than investors and they need to be. They react immediately to any volatility in the underlying; they don’t wait for any news, research or confirmation. Order flow (i.e. buyers and sellers) in any underlying is the ultimate tool to make any decision for a trader.
- Traders may trade the same stock several times a day and investors put their money in the stock after the deep research. Once you have made a trade in a stock whether good or bad, it doesn’t mean that’s all for the day. A stock may keep on hitting new highs or new lows with pullbacks and bounces till the close of the market.
“Good traders exit their positions where they can re-establish at a better price.”
Being a trader you need to know the difference between notional profit and the actual profit. Any profit which is not booked is a notional profit and it may slip out of your hands till you keep that position.
As we can see from the chart given here that a trader may have made good amount of money in the opening moves of the stock i.e. between Rs. 27 to Rs. 29.50. But thereafter, there is no point in holding the positions and waiting for more profits as we can notice that the stock is stuck around 29 levels. During the hard money in this stock (i.e. between 11.30 to 14.30), we may look at other stocks that are moving. At the same time we should keep a continuous watch on the stocks we have traded so that we don’t miss out on the opportunities to make money.
Unitech – 28th Jan, 2009
If we look at the chart given below we can see that this is a difficult stock to trade, still a trader with cool mind and patience can make a lot of money. A trader needs to exit the positions as soon as possible if it is going against him. On the other hand if you are making money in a position, you should hold that position till you feel that the stock is going to reverse its trend. For example, if you are short at Rs. 185 and stock is trading around Rs. 182, you should wait for the stock to further add to your profits and on the other hand always be ready to hit the out i.e. Rs. 183. You should not give up all your profits in wait of a bigger move. If you book profits or hit your out, you can always re-establish. For a trader number of trades is not a matter of concern till he is disciplined.
NTPC – 2nd Feb, 2009
“Any profit is notional profit till it is booked.”
- Trader try to capture profit on each possible move and investor try to get the profits over a long period of time with the growth of the company.
“In trading fast and wrong is right whereas slow and right may be wrong.”
Trader sit like a mercenary guerilla if they sniff a move, they establish a position and if they are wrong, they accept it and hit the out immediately. Traders follow this process till they are sitting in front of the terminal i.e. since the opening of the market till its closing sometimes even before and after that.
- A trader needs to be alert, assertive, focused and disciplined. Whereas an investor needs to be very accurate, precise, analytical and wise. If you look at the stock given below, this chart shows various opportunities to make money for a trader.
Reliance Capital – 3rd Feb, 2009
If a trader who is more comfortable in trading trending stocks, he may not be able to make money in Reliance Capital. But if a trader is alert, assertive, focused and disciplined he can make good amount of money being with the trend and trend reversals in the stock at the appropriate time. These qualities help a trader in two things:
- Creating the position at the best entry points.
- Hitting outs with the smallest losses.
This will help a trader to keep the losses under control and take the maximum profit during a move. The stock has a range of Rs. 23 (Rs. 372 to Rs. 395). Consider a trader has traded only Reliance Capital during the whole day. If he made total of 10 trades i.e. 5 profit trades and 5 loss trades. The net outcome for a good trader would be as follows considering average profit of Rs. 5 per trade and loss of Rs. 2 per trade with 500 shares on every trade.
The net profit at the end of the day would be Rs.7500 i.e. {(Rs.5 x 5) – (Rs.2 x 5)} x 500 and it’s a good profit for any trader.
“At the end of the day what actually matter, is the color and size of the closing number.”