A few words about trading and investing. The difference between the two, in my mind, lies mostly in the element of time. "Trades" tend to be shorter term. Although they will be more likely based on price rather than fundamentals. Investing is usually of a longer term, and will tend to be more based on fundamentals of a company or commodity.
The point of this post is to mention that risk control is neccessary in both the short timeframe of trading and the longer time frame of investing. To me the risk control should be the same in both. Only the time frame of the "trade" will be different.
In a pure trade I will look at a chart and see a point where if the price does that, then this should happen. Usually over the course of a few days. However, one of the points of using charts is to find those spots where the market takes off in a direction and never looks back, so to speak. ie, after you put on a position your profit is never seriously threatened. And then it is like a free lottery ticket. You sit on it as long as you can. That is how the timeframe can change. You look for low risk entry points to add more to your trade. In this way, and only in this way, should a trade turn into an investment. Enter with low risk and let it run....
For someone looking to invest over a long timeframe I would suggest the same strategy. Look at a chart of prices. Pick a spot to get in, whether low price or breakout to new high, and wait. But only buy a portion of what you want to invest in that stock. Wait. After a suitable period of time, you decide what timeframe suits you, if you are profitable on the stock buy some more. But only if you are profitable. The point is to make money. And if you only add to a position that is already profitable you will insure that the trend is in your favor. How does a stock go from $5 a share to $10 a share? Answer: it goes to $6, then it goes to $7, and then it goes to $8.....you get the picture.
In a short term trade where I have expectations about what the price should do I will get out of the trade if it doesn't do what I expect when I expect. This is because my positions that I put on with a trade will tend to be a much larger percentage of my account than would be reasonable if I was investing. A trade will work into a large amount quickly but I will watch it like a hawk and have little appetite for large retracements.
As I have stated before, I put on a trade in thirds. Buying one-third of the total as the price breaks out, or sometimes in anticipation of a breakout if the price action looks compelling, a second third as the price advances, then usually wait for some type of consolidation and further breakout before adding the last third. The consolidation may be no more that 2 or 3 days of weak selling.
What buying in this manner does is it ensures that I have the largest position on for the biggest winners. It also has the effect of making it easy on my mind. As I add each third, I calculate the average of my purchases. When done in this manner they average buying price will always be below where the market is. It is not hard to buy in this manner because I know I can get out with at least a breakeven trade in almost all circumstances. The hardest part is sitting still and letting a large position grow even larger. That is the hardest part of trading. Letting the profit grow.
