You’ve decided to try your luck at trading stocks or commodities, but so called experts tell you that you need to determine your trading objective. What exactly does that mean and why is it so important? Well, it’s really a question of your trading philosophy. A trading objective basically identifies the horizon on which you’ve chosen to trade. For instance, a day trader will have totally different set of objectives and goals than will a long term investor. They look at the market through different sets of glasses and it can be very dangerous to your trading account to try to mix and match trading styles.
Let’s first look at the most common trading objective – long term investing. Long term traders are usually more concerned with company fundamentals such as earnings, annual growth, and sales to name a few. They may use some technical indicators such as price charts and graphs to help time their entry points, but fundamentals are generally more important to them. Long term traders are looking for that home run trade that will pay very large profits. Therefore, they can be right as little as 20-25% of the time and stay earn a nice profit. They have been known to hold a given stock for several years.
The other end of the trading objective is the day trader. Day traders go into the market each day looking for quick small moves of less than a point – known as “scalps”. They use technical charts exclusively and typically buy large positions which they often sell within minutes. Their profits on a given trade is much smaller than those a long term investor would generally make, so therefore day traders must have a very high winning percentage of trades – usually 60% or more to be successful.
These trading objectives are two extremes and are discussed here to illustrate a very important point. If a day trader takes a position based on short term indicators from a chart or other technical indicator, it would be a huge mistake to change that trade into a long term investment because the trade setup wasn’t based on a long term trade. Inexperienced traders will often do this when a short term or swing trade goes bad. Instead of cutting their losses by simply selling the position, they change it into a long term trade hoping that the position will become profitable. DO NOT change your trading objective – stick to you trading plan. This rule will protect your account.
Chuck Cox is a Technical Writer and Industrial Scientist by professional with a background in statistics. He has used mathematical and statistical methods to invest and trade in the stock, futures, and options markets. Chuck has owned various businesses and presently operates several websites. To investigate and learn more about trading stocks, visit his website, http://www.earncashathometoday.com/trading-stocks.htm