The topic of trading vs. investing is an important one. One of the most common mistakes that traders can make is beginning to overlay longer term analysis over extremely short term time frames. We've all done it, and it takes a great deal of awareness and discipline to avoid making this mistake.

For example, two Fridays ago everything I read was extremely bearish and price action was absolutely dreadful. However, stocks were also extremely oversold and sentiment had reached capitulation levels. While it was exceedingly easy to formulate a powerful bearish thesis for stocks, if we had simply gone out and shorted the market we would have had our heads ripped off during the recent rally from 3800 on the S&P 500 to Monday's high at 4200.

When we are trading intraday the most important 'fundamental' is price. Price rules everything and we must learn to not fight price action, at least not too much. With every short term trade there should be a clearly defined risk level and a time frame for the trade to play out.

Investing is much different because we are developing a thesis, and then allowing our thesis to play out over a much much longer time frame. Therefore, we should also size our positions appropriately in order to withstand the much greater volatility that we are sure to experience over longer periods of market time. Moreover, our investing decisions should be more likely informed by fundamental rather than technical factors. Technical factors are sure to shapeshift and morph many times over time, and if we are too sensitive to these transitory developments we risk losing sight of the forest for a single tree.

Simply put, technicals are far more important for short term trading. Fundamental factors tend to rule over the long run. As Warren Buffett likes to say "in the short run, the market is a voting machine but in the long run, it is a weighing machine."

Dr. Brett Steenbarger posted a recent blog in which he made an important point. We should learn which time frame works best for our psychological makeup and objectives - perhaps our greatest edge is in consciously choosing how we will approach markets.

"This is why our greatest edge in markets lies in knowing ourselves and how we best process information. What we genuinely see and understand in markets provides the conceptual underpinning of our success." ~ Dr. Brett Steenbarger

Probably the easiest way to determine how best we process information in markets is by looking at our results. Keep it simple and do what works. 


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