Those who take interest in the world of finance and think about how to make their money work, sooner or later, get acquainted with the ways of investing their funds.
And from the very beginning, a dangerous trap lies in wait for such people, because that’s when they have to address the issue of what their investment target will be. The issue is that amateur investors usually opt for short-term trading instead of actual investing.
Let’s figure out what is the difference between these two approaches, and why it’s newbies who face the threat of choosing the dangerous path of short-term trading.
- Short-term trading and actual investment
Short-term trading and actual investment
In this article, we roughly classify investment into 2 categories: short-term trading and actual investment.
When you engage in the former category of trading, you purchase assets with a hope that the price of the assets will go in the desired direction within a period of time of up to several days or even decades, after which you will close the position.
As for the term “actual investment”, we use it to refer to the opening of a position with a view to close it after the lapse of several years.
You may think that the two approaches mentioned above differ only in the length of time for which you invest your savings. Nevertheless, the difference between them is more significant than it first appears.
And one of the main differences is that short-term trading, as opposed to mid-term or long-term investment, is not intended for amateur traders. And reasons for this are as follows:
1. Beginners get trapped in the illusion of simplicity
First-time investors normally begin with short-term trading because it looks quite attractive to them. They are drawn to trading like moths to a flame, since it’s very easy for them to understand how they can earn money: they look at a price chart, and a price development curve indicates that changes in price happen all the time, which means that you can do trading whenever you need to. You can buy, for example, a currency when its price is low and sell it when the price goes back up. And the difference between the selling and purchase prices is your income. Moreover, you can do the opposite, that is, earn on selling currency instead of buying it. The important thing is to make sure that the price changes all the time, which indeed it does.
Yet nobody tells first-time investors that the price movement is hard to predict, and that a direction in which the price is heading can be completely opposite to that which they desired, and that short-term trading has more in common with lotteries than with investing.
2. Short-term trading drains your energy
However, year after year, month after month, loads of people start to engage in trading in the hope of making a fast buck. They believe that it’s them who will be lucky to find a proper trading strategy and develop the best approach to trading.
Newbies don’t realize that by adopting a strategy such as short-term trading, they embark upon the path of fighting against obstacles rather than earning money.
Short-term trading is about your reaction time. That’s why you have to maintain a consistent focus on a price change when you open a position with a view to close it within a short timeframe, because a currency or security which is being traded is limited in amount.
It means that you need to make the trade as fast as possible. If you are late, it’s someone else who will make a purchase at a bargain price.
As a result, such an intense trading causes a nervous breakdown and leads you to burnout.
3. Novice traders usually have small amounts of money on their accounts
Many first-time traders start playing the market with only small sums of money on their accounts. However, even when they manage to make a profitable trade, they have to pay a brokerage commission every time they close a position, which negates yields on the profitable trades.
That’s why short-time trading is all about big capital. You have to have at least tens of thousands of dollars available on your account in order to make a profit within a short period of time.
4. Amateur traders receive data from an exchange with some delay
When you engage in short-term trading, milliseconds decide the outcome of a deal. For this reason, market makers, professional speculators that have big sums of money available on their trading accounts and work on behalf of major companies, seek to place their trading terminals as close as possible to an exchange, increase the capacity of data links and hence increase the data transfer rate.
Thus, while a newbie figures out which asset he needs to purchase, a market maker manages to make millions of trades in a second. You got that right: we are referring to that large number of deals per millisecond. Before you click a mouse button to purchase an asset at a certain price, millions of completed trade deals change the equation completely and negate a profit from a price movement you wanted to make money on.
As you imagine, by making millions of trades in a short period of time, the market makers affect the price development curve significantly. And since they are able to cause changes in the price of assets, they can easily foresee the direction in which the price will go in the next minutes.
As you probably guessed, newbies don’t have such privileges.
That’s pretty much all we wanted to tell you about dangerous things lurking behind short-term trading. So we hope you consider engaging in actual investing instead of pushing your luck by means of trading within short timeframes.