Lesson 9 – Types of Trading – Long-Term

If we say that a short-term trader is an artist, then a long-term trader would be an engineer. Artists always brim with excitement and passion when they create art pieces, whereas engineers often have to contend with hardships and challenges, as engineering projects require consistent hard work and no one can predict what will happen along the way. A long-term trader must act on logic and not on sentiments.

Theoretically, long-term trading is more suitable for common investors because it focuses on rational thinking. However, this rationality and objectivity also take away the excitement of daily trading. It is a lonely process that requires a lot of patience, much like a monk on a pilgrimage. This is the reason why so many are driven back to short-term trading. Long-term traders pursue market trends, as they believe the latter are their only true friends as well as source of income. They are not concerned about daily price fluctuations because they think these fluctuations are irrelevant. Such indifference make others think that they are fools. Long-term traders do not care about how the market will move the next day, their only concern is whether the trend has ended.

Their perseverance is not something a common investor can understand or accept.

There is a common misconception that long-term traders hold their positions for so long because they are very confident of their forecasts on market trends and know when these trends will end. This is a huge misconception! Long-term traders, just like you, have no idea how the market will swing. They merely track the trends in a disciplined manner.

Holding a position for such a long time and with such discipline is an agony others will not understand. You can even say that the prolonged period of suffering is an opportunity cost for the returns at the end! Huge market fluctuations can easily erode most of the profits held by the positions. What makes things worse is that most of the time you would have expected such retracements. In other words, you are staring at your profits while they are being nicked away. It is as though someone managed to rob you of your money even though you are well-prepared. Can you understand and endure such agony? Long-term traders have to forgo several sure win opportunities in order to hold out for long-term gains. Moreover, there are fewer opportunities for long-term trading due to high market volatility, during which the positions held by long-term traders suffer continuous depreciation. Very often, this is enough to turn initial profits into losses. Such torment is surely enough to crush anyone!

Sometimes, a market may experience drastic retracement which indicates the end of a trend, forcing you to close your positions even though you have lost a good chunk of your profits. After which, you realized that it was just an instantaneous phenomenon and the market continues to move according to its earlier trend. It will take a lot of courage and perseverance to enter the market once more. This may sound easy now, but it is a lot harder than you imagine.

The most important attributes of long-term trading are objectivity and discipline. Many a times, you will be forced to forgo your creative thinking and judgment. However, successful closure of a long-term position can reap huge rewards. This is what makes long-term trading attractive. The key characteristic of long-term trading is that you can keep your losses small while making huge profits. It is not about the number of gains or losses, but the amount. This is where it differs fundamentally from short-term trading.