If You Want To Trade The Gravy Train, Stop Thinking Like An Investor.

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my thirty plus years of introducing people to the stock market, specifically trading the market, it amazes me how Mr. or Ms. Wanna-Be traders do not fully understand what train and possible destination they’re embarking on.

If Wanna-Be is totally new to the market all he or she knows is they want to make money and not lose any along the way. They want to get from here to there, from not rich to rich. They want to get on the expected gravy train. They know it’s been done. They’ve read all the autobiographies from Jesse Livermore to John Paulson.

Travelers come in two types: the short trip point to point rider, and the vacationer out for a scenic route to anywhere will do. In trading, the short trip traveler is our day or swing trader, while the vacationer is our buy and hold investor.

Now, although railroad tracks are mostly long straight stretches of steel showing a direct path, stock prices generally follow no such path. Price moves at the behest of incoming and outgoing volume at various prices leaving behind a jagged sawtooth pattern trending up or down over time. At times, in hindsight, the trip looks like a stair step pattern trending, step by step, up or down.

The first discovery Wanna-Be may find is that the embarkation point, his or her entry price, may suddenly, or over time, be lower than their origination point, implying a loss.

A loss! Wanna-Be didn’t get on this train to lose money but sells anyway so as not to make things worse. Of course, the path this train takes the next day is to move back above the origination point thereby assuring Wanna-Be’s derailment.

Other times, Wanna-Be will hold that losing position because of a news article touting the company’s widgets and the prospects for selling one widget to each of five billion Chinese. Or Wanna-be may have seen an entertaining financial guru on TV punch oversized buttons that bellow out “buy, buy, buy.” Then again, Wanna-Be may be enamored by the management of the company, or the financial statement, or any of the myriad of fundamental data points relative to any company. and so he holds that losing position.

Wanna-Be, the intended trader, the initially supposed short distance point to point traveler just became an investor, a vacationer. He or she will let the stock take him for a ride over possibly a long period of time weaving north and south in price and back again.

The error that Wanna-Be made was starting off on one track, the short-term trade track, and miraculously jumping to the nearby anywhere-will-do track, the vacationer’s track. How is that possible?

The answer is no trip plan, or as we say in trading, no trade plan. Have a plan and trade your plan is a mainstay for traders implying that they know everything about that trade prior to boarding. They know when they’ll get on, the entry price and why at that price. They know where they’re going, the target price and why. They know where to get off if the train suddenly goes backward, the stop-loss and why that price. That’s their plan and they will execute it with a discipline, which means there is no guesswork, no second guessing, no fear, no greed… just cold efficient execution.

If you want to trade the gravy train, stop thinking like an investor. It can’t be done. You’ll drive yourself crazy going back and forth between a trader mentality to the investor mentality. One tells you to get in or out, the other tells you to hold no matter what.

You can’t have it both ways for any one trade. Traders think only in terms of price movement. Traders think of the stock, not the company, while investors think of all those things that are the company.

It is true that if you don’t know where you’re going that any track will do. It is also true that all tracks in this business do not necessarily lead to Easy Street.

Maybe the gravy train is a misnomer.

In any event, heed all traveler warnings and decide now if you’re the engineer of that train (a disciplined trader), or a passenger, the vacationer, aka an investor with a long time horizon.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus