How to Turn an Investor into a Trader

A System to Turn an Investor into a Trader

How can a person make the transition from investor to trader? It is not difficult, but it requires an awareness of one’s behavior and goals. There are seven secrets that can help an investor turn into a trader. It’s time to unlearn your investing techniques.

The Seven-Step System

1.Recognize that the buy and hold strategy is over.

Investors enter the market to buy and hold a stock, option, or currency. Then they intend to walk with a profit staying in a long holding pattern. This pattern could continue for years before a trader decides to sell the position he has held for five years. But traders adopt a different approach. Traders go into a trade with the intent of reaching the price target as quickly as possible. The trader would then move on to the next trade. Traders must forget about this long-term approach and shift to a short-term, quick turnaround profitable trade.

2.Forget about Fundamentals

This is a tricky one. Currency traders often use fundamental analysis to predict price movements. However, most traders will not rely on fundamental analysis, but rather use technical indicators to identify entry and exit points on a trade.

But fundamental analysis is still important to currency traders. The Nonfarm Payrolls Report is one of the most important economic indicators released every month. The FOMC Minutes is another important and market-moving indicator. So, a trader simply cannot ignore fundamental analysis. Instead, a trader needs to shift to using technical indicators while relying on economic data to confirm the technical findings.

3.Be prepared to short the market 

Most investors will not short the market. Remember, an investor aims to buy low and sell high. Shorting the market is a bearish trade that involves buying high and selling low. Many traders strongly believe that a stock, option, or currency price falls faster than it rises. So, every trader should be prepared to take advantage of “shorting” the market. Investors claim that “shorting” the market is too risky. This can be true and shorting is not appropriate for any investor. Nor is it appropriate for every trader. A short trade could open the door to unlimited losses.

Most investors would not short the market. But a trader must be prepared to enter any type of trade: long or short. The focus shifts to making quick profits, rather than making a good long-term investment. A trader must change his or her attitude about “shorting” the market.

4.Focus on the Technicals 

Technical analysis involves using charts and indicators to predict price movements in the market. This is exactly the type of information needed to place profitable trades. Beyond predicting price movements, traders need to know the price at which to enter a trade. This is critical information because the entry point can determine the level of profitability of a trade and even whether a trade is ripe for entering. Price triggers can only be determined by using technical analysis.

Each trader must determine the types of indicators that will be useful. There are dozens of different types of indicators from moving average lines to oscillators. Selecting the right type of indicator, time frame for charts, and type of charts are critical to using technical analysis effectively and profitably.

With that said, fundamental analysis remains important for the framework or background of the price movement. So, focus on the technical indicators, but keep an eye on the fundamentals.

5.Customize your orders: Avoid market orders; use stop loss orders; and employ limit orders. 

Traders need precision. They need to capitalize on every price movement of the currency, however small that price movement may be. In that respect, traders need to customize their entry orders. That means avoiding market orders because they are vague and not defined enough to take advantage of every pip movement. Traders must use entry orders to assure that the trade is ripe and the parameters are triggered.

Besides knowing when to enter, a trader also needs to know when to exit a trade, even if it means taking a loss. Stop loss orders are essential for traders to prevent large losses. Small losses are acceptable if they fall within the parameters of a trading system. Investors are different because they can accept larger losses over a longer period, knowing that they are going to hold and wait for the downtrend to reverse.

Limit orders are also essential. Knowing when to lock in a profit is one of the tools that keeps a trader profitable. Traders should not rely on their instincts or willpower to make the decision to take profits. Greed is a powerful force that has encouraged disciplined traders to hold, rather than take the profit. Limit orders prevent this kind of random decision-making when it is time to take a profit. Investors don’t worry about locking in profits because they are building equity and value in a particular position over time. Traders want their profits quick so they can move on to the next trade.

As you can see, technical analysis is very useful in customizing your trades.

6.Don’t get attached to a currency or any position. 

Investors get attached to a position. They plan to stay in for the long haul to build a nest egg from the price increase of a position. Traders are different.

Traders should not get attached to any position because they will use it only to make a profit then move on to the next trade. They should never trade any currency to which they feel emotionally attached. This is dangerous because it causes traders to break from their trading system and stay with the position while losses are accumulating.

Traders are not callous, cold, or hard-hearted, but they need to able to exit a trade without any need to look back.

7.Use a trading system. 

Investors have mutual funds, certificates of deposit, bonds, and other instruments to guide their investment strategies. Traders have a trading system. They have parameters that let them know when to enter a trade, how long to hold, and when to take a profit or cut a loss. Investors are not as concerned with these activities. They want to buy and hold. Traders want to make a quick profit.

Trading systems can help guide the trader towards quick profits. They also help the trader know how much is “invested” in a particular position. Without a trading system, the trader is drifting along bumping into trades without any guidance as to what opportunities are good, how to use them most effectively, and how to avoid large losses.

Traders must use a trading system. Investors do not need the strict guidance and parameters.

Following this system can help to turn an investor into trader. Failure to follow these steps can cause losses for the trader. There are two camps: traders and investors. Each person needs to know in which camp he or she resides and how to act in the camp.