Thursday, December 4, 2008

Myths About Short Term Trading

There are many myths about short term trading these are the “text book” stereotype. The myths are often wrong or based off of bad assumptions.
These myths are

1. Speculators don’t make money when the markets go down. No, unlike long term investors who get hurt by such things as market crashes short term traders can take full advantage of downturns in the market by buying puts or shorting the stock. I never understood where this myth came from considering most if not all short term traders do not mind playing the downside.

2. Short term trading is risky. Anytime you put your money in the market you are taking a risk, regardless of time frame. Some people seem to have forgotten that buy and hold or investing in big named companies is not always a for sure thing.

3. Speculators can’t beat the market. It is very possible to make between 20-100% annual returns, sometimes more, in the market as a short term speculator. If that isn’t beating the market we do live in a perfect world.

4. Speculators can make money in the short run, but investors will make money in the long run. This comes from the belief that long term traders have that they will make money in the long run if they buy strong value companies. While this has been shown to work in the past you can’t assume just because it works, it works better then trading. Pulling out relatively consistent small gains adds up.

5. Short Term Traders sit at their computers all day and watch the market. This is false, if you are a position trader you do not want to spend more then 5-20 minutes a day (after hours) monitoring your positions, any more is just stressful and not worth it. If you are a day trader you probably want to spend more time, like 30-90 minutes, but the same thing goes here. Sitting at your computer all day is just plan stressful.

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