Do Stock Traders Have a Psychological Advantage over Currency Traders

October 31, 2011 by admin · Leave a Comment
Filed under: Day Trading Forex Currency, stock trading, trading psychology 

[Guest contribution provided by Forex Traders]

It was Warren Buffett that once stated, “To invest successfully over a life time does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”  Mr. Buffett has distinguished himself as one of the greatest “value” investors of all time, but his wisdom applies if you are a long-term, “buy-and-hold” investor or a trader looking for short-term gains when opportunities present themselves.

To be successful in any of today’s trading markets, experts will tell you that knowledge, experience and emotional control are the most important factors that matter, and the latter may be the most important of all.  Traders will practice endless hours perfecting their various trading plans, reducing them to simple steps to be followed while in the heat of battle.  Having a fine-tuned plan that has become ingrained as routine habit is the only tried-and-true way for blocking the mind from unnecessary intervention, especially when the need to close a position is at the top of the agenda.  Is this psychology of trading the same in all market venues?

Over the past decade, the popularity of currency trading has swept the investment community and wooed many a stock trader over to its special style of investing.  As many have found, however, the forex market can be especially cruel in handing out its own form of justice for the ill prepared, inexperienced, and impatient throngs that have rushed to this new medium.  Failure rates are reported to be 70% and higher, thereby suggesting that some subtle differences are at play in this genre that unwary stock traders have somehow missed in the transition.

Both markets support day-trading strategies, as well as position traders.  Technical analysis skills are easily transferred from both worlds, providing the necessary guidance for selecting optimum entry and exit points, free from emotional involvement.  From a psychological perspective, both markets demand that you have a detailed plan with logical steps that cordon off your mind from messing with your “intellectual framework”, but “fear” still raises its ugly head in each genre, but in differing manners.

With stocks, you must worry about the management competency of a company, if its financial records have been manipulated, or if inside information has been leaked.  Potential bankruptcy is also an issue, and what goes down may never come back up.  In the forex world, currencies cannot go bankrupt, and even central banks have difficulty trying to influence this market from the inside.  However, the massive size of the forex market, some $4 trillion daily, and with 80% of the volume related to speculation, every little bit of information can cause massive gyrations in an instant as global opinions are formed and a new equilibrium is established.

Volatility in both markets provides the opportunity for trading, and from a scientific standpoint, stocks are technically two to three times more volatile than currencies.  Currencies, however, tend to change directions more rapidly than stocks, another form of volatility, and it is sensitivity to this other market characteristic that generally requires a defter touch and quicker ability to shift without emotions getting in the way.  It is for this very reason that forex brokers provide free “demo” accounts to practice with virtual cash and real time quotes to build confidence and consistency and to learn the nuances of this extremely fast-paced market vehicle.

Warren Buffett also pointed out, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

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Stock Trading Strategy - Balancing ROI & Hourly Pay With Reasoned Capital Turnover

January 29, 2009 by admin · Leave a Comment
Filed under: stock trading 

When formulating a stock trading strategy, one must carefully consider the matter of capital turnover and its impact on ROI as it relates directly to both dollar profit and time. What is capital turnover? The average length of time that capital is tied up in a trade is the capital turnover. It is usually expressed in days and often as capital turnover ‘time’ or ‘rate’. Another way to look at it is the number of days from the entry of a trade to exit when it becomes available again, or how long it takes to ‘turn the capital over. It is an essential business metric when considering the desired profits for a trading business, in addition to being key to an optimum balance between one’s hourly pay and ROI as they relate to the overall stock trading strategy.
In devising a stock trading strategy, the goal is to maximize one’s ROI. Thinking that turning one’s capital over as frequently as possible is best, traders often err in considering only the dollar aspect of ROI and not that of one’s time investment. Trading capital is turned over almost immediately for day traders. Over the course of a year, this short turnover time offers a high frequency and high number of capital turnovers. Short, medium and long term trading may have a longer turnover time, but allow the trader the possibility of a much lower time investment.

Return on one’s time, or hourly pay, is an important consideration of the stock trading strategy, just as it is in any self-employed occupation. Expecially when the business will be matured, return on one’s time can not be overlooked. Financial freedom plus freedom of time is why most people enter trading. One without the other does not provide a desirable quality of life. Both are necessary.

Let’s look at an example. A person might choose day trading as the core of their stock trading strategy because with the short capital turnover time, they could possibly realize an ROI of 25% or $5,000 on a $25,000 account. Their hourly pay is only $21,28 if they are working 50 hours a week. A medium term trader who can afford to trade a more selective system since they are looking for fewer opporunities, might realize a lower ROI in dollar terms, say only $3,000 or 12%, but only investing 15 hours per week. The hourly pay for this trader would be $46.18, or more than double that of the day trader.

Time investment versus the dollar return is the primary difference. For a given account size, the capital turnover time dictates the number of opportunities that can be taken during a given period of time, so it is also related directly to the ROI. Care must be taken in selection of one’s strategy because the different strategies also determine the required investment of time. To ensure that the hourly pay is acceptable with a chosen strategy and particularly system, backtesting and analysis must be conducted to ensure an adequate winning percentage and profitability. A business-smart trader will optimize their ROI for both money and time through proper analysis, measurement and calculation of the various performance metrics of a given stock trading strategy.

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Stock Trading Strategy - Crucial Matters In a Stock Trading Plan

January 22, 2009 by admin · Leave a Comment
Filed under: stock trading 

The stock trading strategy is at the core of one’s trading business, and care must be taken before choosing a stock trading system. Several criteria must be met in order to satisfactorily achieve the objectives of the investor, and the strategy determines the system used. In order to end up with a system and plan that can be traded well, it must suit one’s personality, so the criteria includes a number of specific considerations. This article will examine several key questions that need to be asked in order to have the optimum system.

In defining a stock trading strategy, one of the most important fundamental questions is regarding the trader’s time available for trading. The desired level of involvement as a trader in the trading activity goes right along with time available. The consideration of time doesn’t just mean how much time can be made for trading, but how much is desired and when. For the person that has a family, a job and a busy life, full-time day trading would likely not be suitable.

Next comes the matter of capital turnover time. Turnover time is how long capital is tied up in a trade, or the time before it is available again for another trade. The longer term trades will have a greater capital turnover time and thus fewer opportunities can be seized during a given time period. Another aspect of capitla turnover time is that of annual account ROI vs. per-trade profit. Even with the same profit per trade, the higher annual ROI can be realized with a lower capital turnover time. The trade off is that shorter term trades require much more work and involvement than those with a greater turnover time. Finding the desired balance is a critical decision for the business in terms of stock trading strategy. An overall determining factor is the desired annual ROI. One may choose an aggressive or conservative approach depending on the objectives for income and wealth-building.

A chosen stock trading strategy and stock trading plan must also work within the trader’s comfort zones, to ensure a good fit with one’s personality. The system and rules should be such that the trader can follow them with reasonable ease . Good trading is quite difficult when emotions come into play and affect the trader’s decision-making. A strategy or system with aspects that are too far outside the trader’s comfort zones often contributes to this problem.

There are several specific aspects of a stock trading strategy and chosen system which need to align with the trader’s comfort zones. A reasonable winning percentage is necessary so that confidence is not lost through losing trades that occur too frequently, yet are inherent to the system. Right along with this is a tolerable maximum drawdown, for the same reason. A system should not be too limited regarding market conditions and should be fairly robust. The financial goals must be attainable, so the stock trading strategy and system must have a sufficient profit-potential - this is one of the most important facets.

The stock trading strategy must be thought-through and well supported for the result to be a reliable and consistently profitable business. To confirm that the system is aligned with the trader’s comfort zones and has a realistic potential of fulfilling the objectives, the system should be backtested, analyzed and measured. Prior to any money being risked in the markets, backtesting and review of the metrics should be conducted so that the confirmation is completed without risk.

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