Thoughts For Short Term Investors

Q: For years, earnings, yields, P/E ratios, industry outlook, economic trends, interest rate direction, and other rock-solid indicators were invaluable tools for investors...AND, they worked. Anyone using common sense while doing their homework had a fairly easy time making money in the market.

A: It's true that this market is so unpredictable there is no telling how
to time it as a whole. But I believe you can time certain sectors. When
the biotech sector had its huge runup at the beginning of the year it was
started by analyst predictions and off it went. Now the semiconductor
sector is moving up. You have to sell when they sta

rt going down.

The one rule I follow as a short term trader is never ever hold onto a
losing stock. You have to sell for a small loss if you are wrong. People
who don't follow this rule are doomed. The lack of selling losers is the
number one factor most people get wiped out.


Of course you could have been holding MSTR overnight and got caught in
the freefall. But anyone holding that stock at those prices when it tumbled
was asking for trouble. Once a stock gets over 200 and 300 dollars the
chances of it falling drastically increase substantially. You are much
better off trading stocks in the 10 to 50 dollar range in my opinion. They
recover better after selloffs and move in higher percentage moves than the
massive price stocks in runups.


I think the important point is that short-term traders MUST
use different "rules" than investors. Many folks, as you point out,
are unsuccessful at it because they don't understand this and/or they
are not psychologically prepared for it.


Even those who do have some grasp of the necessary rules
tend to break them too often. I think most of us lack the mental
discipline required to completely ignore outside influences &
temptations and stick to a working system. Even successful traders
tell stories of getting burned when they stray from their own rules.


For investors, fundamentals are more important than short-term
price movement. They should do their research, buy good companies,
and not worry about the normal daily and weekly actions of the market.
For a trader, the opposite is usually true. The trick is to ignore
all the "noise" and concentrate on what you are trying to accomplish.
This is difficult to do, of course, which is one major reason why so
many short-term traders are not more successful.