Long-term value has been taken by the mainstream to be the “de facto” number one methodology when it comes to investing. While the approach has its merits, such as being grounded in logic and fundamentals, it requires a lot of patience given the timeframe required and might not be the right fit for everyone. Particularly, short-term trading may be a better fit for certain personalities.
Isn’t Short-Term Trading The Same As Gambling?
Before delving into details, it would be appropriate to consider the difference between short-term trading and gambling. The first refers to trading approaches based on a valid system that has a grounding in reality, and the second refers to simply taking a punt without having an edge, just like in a casino or at the horse races. Thus, when someone says they are trading purely according to “gut feel”, chances are that their approach is more similar to gambling that intelligent risk-taking.
Good short-term traders base their profitability on a logical grounding of probability and statistics. This means that they don’t need every trade to make money – just enough when they win to offset all their losses. Thus, their profitability should be looked at across many trades, not just one. This runs opposite to the mainstream financial media and value investing in general, which emphasizes a lot on who gets their predictions right.
Everyone Has Their Own Religion About The Market
What many may not realize is that what happens in the market is highly dynamic and doesn’t follow a straightforward approach, such as in chemistry – where a fixed formula tends to lead to a specific outcome. A quantitative trader in a bank, the uncle sitting at home and the value investor all see the same assets trading at the same prices – but all have different theories and viewpoints.
Thus, while people may argue among themselves whose approach is the best, the market serves as the best judge of each approach and results should be used as a barometer of success, not theoretical reasons.
Keep An Open Mind
Ever wondered what Warren Buffett, George Soros and Jim Simons have in common? Despite the differences in their approaches (each taken to be the best in value, macro and quantitative respectively), they have all managed to make superhuman returns from the same financial markets.
In the same vein, there is perhaps zero value in contemplating or arguing about whether short-term or long-term trading/investing is better. The only right answer is whether the approach suits you – your personality, account size, technical knowledge and so on.
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