In our previous posts we covered two topics central to this blog, Stoicism and Investing. Today we are going to take a look at the other half of our name, trading. Although I don’t foresee trading playing a prominent part in the blog going forward, I think it’s important to cover in some form. If the appetite is there for more trading focused blogs I will post them, but for the time being my focus is on investing. Having said that, I am a firm believer that trading and investing have overlapping skills. Our next post should cover this in some more detail.
As always, I think it’s a good idea to start with a definition. The Oxford English Dictionary defines trading as “the action or activity of buying and selling goods and services”. Pretty simple stuff. We all engage in trading every day. For most of us, it is trading our time for money in the form of a job. For others it is selling goods to customers, or providing a service to a paying customer.
The definition of financial trading builds on the previous definition. Talk Business defines financial trading as “the buying and selling of financial instruments’in order to make a profit”. Financial instruments can be anything from stocks to bonds, currencies to derivatives. Financial trading is usually undertaken on a much smaller timeframe than investing. The typical investor will hold on to a particular position for years, even decades. The trader will hold a position for as little as a few seconds.
There are many forms of trading, from scalping (seconds to hours) to position traders (months to years). As such there is a plethora of different ways to make money. The flip side is there is also a plethora of ways to lose money. Like investing, traders can focus on a variety of asset classes. In my opinion, the asset class matters less in trading, the time frame of the trade matters more.
Different Time Frames
As we touched on previously, there are different types of financial trading. These are most easily defined by the time the positions are held for. They are;
- Scalping. Scalping involves using charts with timeframes from tick charts to 15 minute charts. Trades are held for a few seconds to a couple of hours.
- Day Trading. Day traders close their positions before the end of the day, they do not hold overnight positions. As such, they trade on slightly longer timeframes (5 minutes to 1 hour charts) and can hold positions for a few hours if necessary.
- Swing Trading. Swing traders tend to hold their positions from a day or two up to a few weeks. 4 hour charts are prominent for swing traders, but the definition is more concerned with the holding time.
- Position Trading. Position trading is the longest of all trading timeframes. Typically traders hold positions for months or even years. Daily or even weekly charts are often used.
The above chart timeframes are just a guide, there is no hard and fast rules. There is nothing stopping a position trader using a 1 minute chart,but the lower the chart timeframe the more variation you are likely to see. As a position trader will be holding a position for months, the minute to minute price fluctuations are not that important.
Trading – Time and Money
Trading is not a get rich quick scheme. To be a successful trader takes time and money. You need to invest time into learning the basics. You will also need to discover your own trading style, are you more suited to the ultra-short term trades or does a slightly longer timeframe suit you? Much like investing, trading requires discipline. WIth this in mind, Stoicism also has a role to play in your trading. Keeping your emotions in check is crucial to trading. A word of warning, traders are prone to look for the instant solution or the next big thing. If you want to pursue trading in a serious manner, put in the work. Don’t look for a quick solution or fall for schemes that promise returns that seem too good to be true.
Like investing, trading takes money. Without capital you won’t be able to trade at all. Before you decide to trade with your hard earned cash have a concrete trading plan in place. Trading without a plan is just gambling.
The Stoic Trader