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A look at the trading world

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Investing and trading are two contrasting ways of trying to make a profit by participating in different financial markets. Most people consider themselves investors and dislike the label ‘trader’, although some of the self-identifying investors are in fact traders. Little do these people know that some of the biggest winners in the financial markets consider themselves traders.

In general, investors seek more significant returns over longer time frames by buying and holding assets. They put capital in their selected markets on the assumption that the value of their investments will increase over time. As the value of the assets they invest in increases, so does the value of their investment.

Related: Why Investors Should Never Just “Buy and Hold”

The difference between investors and traders

Because of their long-term mindset, investors typically don’t have a plan for when their investments fall in value. They hold onto their investment in the hope that its value will reverse itself over time and continue on its upward trajectory. That’s because investors anticipate bear markets with trepidation and have no intention of reacting if they lose. When prices crash, investors tend to hold onto their positions.

In contrast, traders take advantage of both rising and falling markets to enter and exit positions within shorter time frames, making them more likely to take smaller profits. As such, they have a somewhat negative reputation among innovators and investors. It is not uncommon for traders to be referred to as “greedy” or as “innovation killers”. However, the truth is that traders are some of the bravest and most disciplined stakeholders in the financial markets.

A trader has a particular course of action or strategy to bring capital into a market with one goal: to make a profit. Traders are not concerned with the assets they trade. All they care about is analyzing trends for an opportunity so they end up with more money than they started with. In a perfect world, traders want to short as often as they go long so that they can profit in both rising and falling markets. However, like investors, most traders prefer not to go short as they struggle with the concept of making money while there are downturns in the financial markets.

Related: Learn Trading Strategies To Grow Your Wealth

Fundamental Analysis and Technical Analysis

There are two basic principles of trading: fundamental analysis and technical analysis. Fundamental analysis studies externalities that can influence the supply and demand of a particular market, such as government policies, domestic and foreign political or economic events, and much more. For fundamental analysts, they believe that it is possible to predict changes in market conditions before they are reflected in market prices by closely examining these external factors.

On the other hand, technical analysis is based on the belief that market prices reflect known factors that affect supply and demand for a particular market at a given time. It is a broad field that uses price and price related data to determine when to buy and sell. Technical analysis tries to bridge the problems that fundamental analysis has about the specifics of timing and risk. Technical analysts believe that careful analysis of price action is enough to take advantage of trends. A technical analyst can analyze and successfully trade the charts for a particular market without understanding them.

There are two types of technical analysts in the financial markets. One type “deifies” the market direction through their ability to read charts and use indicators. The other type of technical analyst neither predicts nor predicts the direction of the markets. They are known as trend followers.

Rather than predicting a market’s direction, trend followers react to the market’s movements as they occur. They react to what has happened instead of anticipating what will happen and try to outsmart the market. Trend followers keep their strategies based on statistically validated trading rules, allowing them to focus on the market without letting their emotions get in the way.

We’ve identified the difference between being an investor and being a trader. We went one step further to define the two main theories behind trading: fundamental and technical analysis. There is another distinction for traders: traders can be discretionary or mechanical.

Discretionary vs. Mechanical Traders

Discretionary traders make their buying and selling decisions based on the sum of their market knowledge, their view of current market conditions or a number of other factors. In other words, they use their discretion to make their trading decisions, and as a result, their choices may be subject to behavioral bias.

In contrast, mechanical traders practice a much more disciplined investment process. They never use their discretion when making trading decisions. Their decisions are based on an objective and automated set of rules derived from their market philosophy. Mechanical trading systems simplify life by eliminating emotions from trading decisions, forcing traders to follow rules.

Related: What Kind of Trader Are You? An Introduction to Trading Behavior

In recent years, political and economic changes of enormous magnitude have taken place. At the same time, technology has made tremendous strides causing significant changes in the trade and investment sector. It has become of paramount importance for individuals interested in entering financial markets to discern which strategies work best for them and to exercise those strategies with discipline.

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