Thursday, September 21, 2017

The Two Kinds of Traders

If you were given a million pesos today to trade one stock and were to choose between these two stocks and with only their charts as available data, which one would you pick?

Stock A

Stock B

Remember your answers because today, we'll talk about the two kinds of traders represented by Bob (A) and Carl (B).

Let's start! 

Bob is where majority of traders belong to. He focuses on stock prices and declines, and see these events as buying opportunities. A fire sale that would give him profits in the long term.

But what exactly is long term for Bob?

No one knows exactly how long it is. It could be a year, 5 years, 10,  Indefinite? who knows? For the answer to this question is very subjective. But the most common answer Bob has is this:

Time isn't much of an issue. Price is. Or more accurately, feelings are. Basta feel ni Bob magsell, then he sells. And for this example, he sees the highest price as the reward. "Pag bumili ako ngayon at BUMALIK to sa 16, makakabili na ako ng (insert bucket list item here)"

Most of the time, this is where speculation and fundamentals start to creep in and play a major role in Bob's mind. Because these two things give him the justification for his decision and the hope he needs for his long term dreams. 

A year and several months pass and we check on how Bob is doing...

. . .

"Okay lang kahit hindi na hit yung TP ko. Long term naman ako dito at magandang companya naman tong ininvesan ko, (Insert future company plans here.) Babalik din to sa 16! Buy and forget! #ProudInvestorHere"

These are the most common lines you'll hear when traders of this type end up with a stale or a losing position and do not want to move on. Add to that their collection of quotes and wallpapers from Lolo Warren to give them encouragement and strength for the coming years.

"I am a patient trader. I will hold until thy TP come."


Let's go to the 2nd type of trader, Carl. Now, unlike Bob, he puts a premium into trends rather than prices and feelings. For him, there is no such thing as an expensive or a cheap stock. Only trending or non-trending stocks. 

Carl understands that even if prices have appreciated significantly but still follows the trend, there is still plenty of room to make money. He doesn't care about buying the stock at a cheaper price like Bob so he could feel good and feed his ego, he cares about feeding his portfolio and managing his time well.

When it comes to trading, understanding trends is as important as breathing in real life. We all know there are 3 types of trends right? 

Uptrend. Downtrend. Sideways.

Trends don't change overnight. OK sometimes it does, but that rarely happens. And Carl understands this fundamental principle : That if a stock came from a long downtrend, it first has to reverse by consolidating into a sideways trend, then slowly transition into an uptrend. Obviously, this takes time - days, weeks, months, years? Who knows?

So instead of buying into sideways or downtrends and waiting for these lengthy transitions to finish, Carl instead focuses on buying a stock that has an established uptrend. He knows that if he does this, he will save a lot more time. And as the popular saying goes: The Trend is Your Friend. 

And in just a few months, here's what happened...

91% in 115 days.

So what are you saying Zee?

I'm saying perspective is everything. If you want to make money the faster way in our market, buy stocks that are already trending up and making new 52-week highs rather than waste your precious time buying downtrends and waiting out the transition period.

Not saying you won't make money with Bob's method. But just saying... a moving train is faster than one that's just starting its engines for the day.

Exhibit 1

ATH Stock. Holding Period : 6 Trading days.