Make this one decision today if you want to find success on the markets

Warren Jeffery, 14 Nov. 2012

With the flood of stimulus flowing into global markets, sentiment is dominating the markets.

And this is forcing you to decide whether you’re a long-term investor or short-term trader. In fact, not making this decision could result in your financial ruin.

Let me explain…

A long-term view for short-term trading will set you up to fail!

Recently I was chatting with a trading colleague of mine, Reino.

Now, Reino is a very good trader who has always spent his days making money from the markets trading both longer-term and shorter-term positions.

The thing that has really set Reino apart over the years has been his ability to consistently earn money every day. He hardly ever has a down day.

However, Reino was recently telling me how something has changed in the markets.

Something he couldn’t quite put his finger on… But all of a sudden, he’s started to lose money.

To try to understand where he was going wrong, I asked him to tell me how he goes about trading.

He explained…

The first step he follows is to look at a company’s fundamentals. By doing this, he’s able to get a gauge on the long-term value of a share.

Reino then likes to trade the share using derivatives such as CFDs or SFFs.

He says that if the long-term view on a share is up, then why should he buy the share and wait months for the gains?

By buying the derivative on a share, he can leverage his position and that way he only needs a small move in the right direction to make big gains in just a couple of days.

But recently, when he placed his trade, the share would move against him just enough to stop him out of his position. And the most frustrating thing is, as the weeks went by, he would look at the share just to see that his long-term view was right and the share was moving as he’d expected. But of course, because he was stopped out, he made a loss instead of a gain.

Straight away I knew what Reino was doing wrong…

Use the right instrument for your trading view…

The problem was, Reino was trying to trade a long-term view with a short-term trading instrument.

And because trading using derivatives magnifies your exposure, small moves in the share price are exaggerated when it comes to your profits and losses.

And this meant that Reino’s stop losses were triggered too easily.

But you’re probably wondering, why has this only become a problem for Reino recently?

Well, although this strategy has worked well for Reino in the past, recently the markets have become more and more sentiment driven. And this has seen the market moves become more erratic.

So now, instead of like in the past where the markets would slowly trend towards their fundamental value, shares are bouncing around violently as investor sentiment swings.

These violent moves mean investors need to decide if they‘re going to trade the very short-term moves driven by investor sentiment for quick small gains using derivatives, or they must avoid derivatives and rather invest in the actual shares with a long-term view.

Doing this will allow you to get involved in the markets without being thrown out of good position by sentiment driven volatility.

So make sure you’re not lead to financial ruin.

Make sure you decide whether you’re a long-term investor or a short-term trader. And once you’ve decided, make sure you’re using the right instrument for your trading view.

Warren Jeffery

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