Forex Trading Tips:Mark This - Why Trading is Harder Than Investing

Mark This - Why Trading is Harder Than Investing

When I was starting out in the business we once had a customer who was long about a million euros on a $50,000 account. The guy had held his position for a long time but by accident he hit the sell button one day and called the desk in a panic screaming that he wanted his account back. All throughout his holding period the account had shown a balance of $49,000 reflecting his margin requirement but his floating equity had deteriorated markedly because the euro was in a downdraft. He didn’t care. All he wanted was for his balance to once again reflect the original number, We tried to be reasonable with the guy, telling him that his equity was the true value of the account, we even offered to put him back in to the market at no spread, but he was inconsolable. He wanted his balance back and he didn't want to be marked to the market refusing to acknowledge his true position

That little incident tells you everything you need to know about why trading is so much more difficult than investing. No one ever wants to realize losses. As long as they are floating they don't exit.

Take two savers. Saver A decides that he will be an investor. He selects twenty high quality stocks splits his capital evenly and puts on the position which he holds through hell and high water. Saver B on the other hand decides to be a trader, She takes one trade at time and carefully manages her ideas with stops and limits exposing much less of her capital to risk. Over the long run Saver B may be able to produce a better return than her less active investing colleague let's say returning 10% per annum versus just 6% for saver A. On a $100,000 portfolio that a difference between $672,000 versus $320,000 over a period of twenty years. However there is very little chance that Saver B will actually be able to achieve this goal because trading means controlling your risk and usually after the third consecutive loss most human beings will simply stop taking stops. The pain of being so persistently wrong is just too much for most people to bear.

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This week I conducted an interesting experiment. I ran two versions of my algo. In one I ran the standard strategy with tight stops. In the other I ran the same set up but with much wider stops, to see if I could avoid the slippage that plagues my strategy. Initially the wide stop version did well, avoiding some stops of the original version, but then the strategy hit a drawdown. Although both algos were chopped up mercilessly by the trending market, the original version recovered much quicker while the wider stop version whihc was saddled with massive losses that took much longer to recoup. It was an interesting lesson in market dynamics and one I doubt I could have learned without the dispassionate aid of the computer.

Investing also has plenty of losses, but they are typically hidden from view. For every Kodak and General Motors and Chrysler in the portfolio we hopefully have a Google, and therefor aren't forced to confront our mistakes as they happen. Also, trading is work - we have to fight for every basis point and babysit every position, while investing feels like the lottery. Just buy and hold, close your eyes and like a modern day Rip Van Winkle wake up to a nice pile of money.

Of course its never that easy. If you bought in 1929 it would take until 1954 for you to break even and if you bought the Dow in 1999 you've essentially made no money in a decade, and if you had the misfortune to buy Nasdaq at 5000 it may take you several lifetimes to recover your money. That why despite its difficulty and its psychological toll I believe that trading is ultimately superior to investing. If you can make peace with losing, if you can learn to confront your mistakes and if you can accept the pain of a multiple stop outs, you can persevere and triumph at making money.

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