Towards the end of 2020, the majority of traders and investors had been expecting an increase in stocks, with vaccines on the way that could drastically boost the economy at the beginning of the second quarter. The question in everybody’s mind as we begin 2021 is how the market will truly respond in comparison to last year and are there any useful Trading Tips to follow?
A simple answer to this is — it depends on the market being monitored. Currently, an increase can be seen in anything involving cryptocurrency, with Bitcoin leading the pack as of late 2020. Though it suffered during the first week of 2021, we’re now seeing it (and others) skyrocket!
The same can be said for gold and stocks such as Dow Jones, Nasdaq, E-mini Russel, and S&P 500. At the moment, they’re all on an all-time high, but as we previously mentioned, it really depends on the market you’re viewing specifically.
Differentiating the Trading From the Investing
Investing and trading are two different methods for profiting in the financial market. Both seek to gain from market participation, but each takes advantage on their own terms. These are their defining characteristics:
Investors and Investing
Investing is often referred to as “lazy trading.” It’s not an entirely bad thing to be a lazy trader, though. Lazy trading is a considerably smart thing to do. This is when investors prefer to invest in the long term vision and growth of something.
The main goal of investing is to build up wealth gradually and over an extended period of time. This is achieved through the purchasing and holding of a basket of stocks, mutual funds, portfolio of stocks, bonds, and other forms of investments.
Generally, an investment can take on a period that spans years or even decades. Investors opt to take advantage of the benefits such as interest, dividends, and any stock splits that may occur during their investment period.
Even with constant market fluctuations, an investor will choose to ride out the downtrends with the idea that these prices will eventually rebound. More importantly, any losses incurred will be recovered and profited from. Typically, investors are likely to show more concern over market basics such as management forecasts and price to earnings ratio than on Trading Tips.
Trading the Way Traders Do
Trading involves transactions that are more frequent. Short-term traders participate in the buying and selling of stocks, currency pairs, and commodities in either the day’s or the week’s movement. It’s incredibly rare for a trader to trade on the month’s or the year’s movement.
To sum it up, traders involve themselves in transactions that are more frequent with the goal to generate returns that are able to outperform the investing method of buy-and-hold.
Unlike an investor who may be content with 10%-15% in annual returns, a trader’s goal is to achieve a 10% return monthly. The profits of a trader are generated through buying low and then selling high. To profit in falling markets, traders buy to cover at a low rate and sell at a high price.
Where the buy and hold investor rides out the storms, a trader must seek profits within a specific timeframe. Often they’ll implement a protective stop-loss order to close out losing positions automatically at a price level that is predetermined.
Understand this, however, that markets continue to react in a typical and normal fashion. Short-term traders can expect all-time highs, though realistically, it all comes down to managing risks and focusing on short term pullbacks. As an investor, it’s important to be prepared for markets to retrace when the market rallies.