Art of Trading, Fun of Trading

In the stock market, there are basically two types of players making the daily market movements: investing vs trading. For investing, we are basically talking about long-term investment, which is primarily driven by the fundamentals of the underlying stocks. For trading, it is more of speculation of the short-term movement of stocks and is often nothing to do with the fundamentals but rather the technical setup or sentiments for the stocks. Trading can be in hours, days or weeks with a quick turnaround but investing is typically in at least months or often in years. Personally I’m doing both with my core positions for value quality stocks for long-term investment but at the same time using the technical analysis to do active trading, aiming for quick profits. After many years in the market with active trading, I can summarize the following four levels of satisfaction based on the results of trading. Needless to say, if I’m wrong and lose money for a trade, I feel sad but I always try to learn something from my failure. Below is more of how I will feel when I’m right and making money from trading.

Level 1: Go with the crowd.  This is the basic level of satisfaction that I make money when everyone else is also making money. In other words, I get my trade right for a trend when everyone else is also seeing. Yes, I’m happy but I don’t get too much sense of rewarding with this kind of winning.

Level 2: Make money against the herd.  I get a better sense of rewarding when I trade for an idea that not many people see it. As I said, I’m basically a contrarian against herd and I often see and do something different from most of others in the market. Believe or not, I’m often right and making money by being a contrarian, which gives me quite good satisfaction.

Level 3: Still make money when wrong.  While it is great that I make money when I’m right with an idea, I’m sure you can understand that I will be much happier when I can still make money even when I’m wrong on an idea. This sounds crazy and not believable to many people but believe or not, it is not uncommon that I made money even the stock moved in a different direction from what I was expecting. In options there are different strategies that may make this happen and one typical strategy is to use naked puts to bet for a stock to go up. But with naked puts, you don’t need to be absolutely right for making money. All you need is to bet that the stock won’t drop too much from where you are betting on. In other words, you can make money when the stock is moving up, is staying where it is or even it is moving down a bit, as long as it is not declining too much. Now think about how you will feel when you still make money when you think the stock will go up but it is actually going down? I feel great when this happens and truly get a much bigger sense of rewarding! Just a caveat for those who know how to do naked puts. This is not for everyone and definitely not for any stocks. If not setting it up right, you may lose a lot of money with naked puts. In theory, naked puts have a limited upside but have an almost unlimited downside. Don’t play with it if you don’t know what you are doing with it!!

Level 4: Turn losers into winners.  This is the highest level of satisfaction for me when I’m totally wrong with a trade from the very beginning and all along but I can turn the trade around and eventually turn the loss into profit. This is not something easy obviously but it has been working very well for me to save some of my wrong bets that would have otherwise hopelessly lost money. Again, with options this is possible and you can imagine how much rewarding I will get from this kind of results. Of course, I’m not saying I can do this for all the losing positions and all the time. It is simply not possible and I’d be a big liar if I’m leaving you with this impression. But with sufficient time available and right setup for a stock/option, it is indeed possible to turn a loser to winner without involving additional risks. Now think about it: for any traders, wrong ideas with losing positions are inevitable and are part of trading. For professional traders, it would be considered hugely successful if they can make 50% of trading ideas right. Of course I have to accept I will have many losers for my trading. But if I can turn portion of my losers into winners, I may substantially enhance my overall return. After all, trading is about making money regardless if your idea is right or wrong!!

This is a great strategy working well for me and I’m continuing to perfect it.  I think this is something with which I can set up a business for me for a win-win situation: I can diagnose someone’s portfolio for the losing positions and if possible, come up with a personalized salvage plan to help him/her to minimize the loss and in return of course I can also get some reward.

As you can see, trading or investing is not simply about making money for me; rather it has become a self-rewarding process that I really enjoy and have passion about!