Long Term Investing versus Trading
As any trader or investor will tell you, there is little to no chance that you are going to have a win percentage over 70-80% for the life your portfolio. But, that doesn’t mean you can’t increase your wins using a variety of techniques to help you gain the advantage. My multi-month trade earlier this year in USO was a perfect example of trade management that turned a long-term position into a nice winner.
If you have experience with professional money managers or financial advisors, you may be familiar with the term, dollar cost averaging. In short, dollar cost averaging is where an investor contributes an equal amount of money on a regular schedule, over a long period of time into the same investment. This means that when the investment price is high, you will buy less shares, and when the investment price is low, you will buy more shares. Over time, you will accumulate shares at an average price that is less than the current price of the investment. Basically, you buy more shares on sale and capitalize on the market fluctuations, but remain bullish longer term and rely on inflation to profit. This is a long-term investment strategy that is quite common among the investor community. It is also a very successful and generally safe, conservative strategy. However, as a part time trader or swing trader, we can utilize this strategy and others to capitalize on short-term price swings as well.
The problem for active traders and investors using the dollar cost averaging method of investing, is that you have to be committed to a much longer time in the position in order to realize your gains.
The Power of Options
Most brokers will allow you to trade options in your portfolio, but will require some intermediate investment experience and risk tolerance for that capability. I am a huge proponent of various options strategies to help you not only mange your risk, but to also increase your profitability in short periods of time. If you don’t know what options are or how they trade, I suggest taking a look at Investopedia to get the basics.
There have been a few occasions this year, where it has become necessary to sell covered calls on positions that I had been holding for a couple of reasons. If the trade had gone against me at some point, I was looking to lower my net average in the trade without accumulating more shares and risking more equity. Or it could have simply been that I was up on a trade that had a nice run and wanted to increase my profit on the trade by capitalizing on the premium volatility of that move up.
Options provide tremendous flexibility for short term and long-term traders. They give you leverage and a safety net in some instances, but can also help to protect and hedge long term positions from drastic market downturns and volatility. The uses for options vary as much as the imagination in how one person uses them from the next.
In any case, if you are planning to take your financial destiny into your own hands and trade your own accounts, you have to realize that you are responsible for the gains and losses. You can’t blame the market and you can’t blame the trades. Investing and trading is a game of probabilities and statistics. The more you know your numbers, the more you will gain an advantage. If you are flexible and able to maneuver your trades throughout the various market cycles, you stand a great chance of profiting long term and being successful.