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Short Term Strategies

The majority of short term strategies are of investors who look to day trading to replace their day job.  Not a bad idea but unfortunately most short term traders come to the market with very little money, take huge risks, and it's only a matter of time before they crash.

In order for you to consistently make money as an investor it's important to have a winning strategy, but first and foremost you must manage your expectations.  20%-30% a year is all I shoot for in my personal investments, and with my capital I am able to live off my investments.  If, on the other hand, you have, let's say $100,000 in capital, it is going to be tough to live off a 30% ROI, or $30.000 a year regardless of the fact that it is a wonderful ROI. 

In trying to cut corners, short term traders use excessive margin or choose extremely volatile stocks as a means of maximizing returns. Unfortunately, the minute the market becomes difficult and goes against them, the losses are inevitable. If there is one thing I want to impress upon you, it is that there are no short cuts in money management.  Probably 95% of all short term traders end up losing money.  Why waste your future?

Tons of people lose serious money in short term strategies. Take for example the stop loss order rule.  The original idea was to protect investors from losing money to bad investments.  Sounds reasonable, but in reality stop losses had a major impact on how investors operate.  Instead of evaluating investments based on value, the concept now is, "Let's just buy it, and if it falls I will just lose 10% as my stop loss gets hit". The most common statement you hear from option players is the following, instead of risking $40,000 I will just put up $4,000, and if I am wrong all I can lose is $4,000.  The problem with this kind of thinking is that instead of accumulating winners, you are creating a system biased toward accumulating losses.

The stock market is an enticing trap.  It is so easy to get disillusioned, it's almost like a game in the game room where it looks so easy, you just have to try it.  In reality, after you spend your quarter you realize the machine is rigged against you.  The same phenomenon occurs in short term strategies.  On the surface you see stocks making huge gains right in front of your eyes. In reality when you actually buy the stock the outcome is different.  Is there more here than meets the eye?

In actual fact, short-term strategies have the potential to be far more lucrative than long-term plays. The mathematical reasoning is simple: a stock that moves from 40 to 80 over the course of a year or two makes 40 points for a buy-and-hold type investor, but can make hundreds of points for an in-and-out investor because of the constant advancement/retrenchment in stock price that occurs along the way. 

For a trader with perfect timing, the theoretically maximum profit potential is the length of the zigzag curve between the starting and ending points of the price curve. The more volatile the curve, the greater its length and profit potential (but the sharper one's timing must be to achieve this). 

Suppose the length of the price curve in moving from 40 to 80 over the course of a year was 1,000 points. This means that there was a total of 520 points of up movement and 480 points of down movement that occurred along the way. The perfect two-way trader who correctly called every move could thus make $1,000, while the one-way trader who restricted him- or herself to long positions only could thus make $520 (ignoring the impact of commissions). 

There are extremely few traders (if any) outside the trading floor with timing skills good enough to achieve or even approach such results. By the way, before you conclude that only God can be the perfect trader, note that market makers and specialists in NYSE and AMEX listed stocks do achieve such results, for the reasons that: (i) they are the enforced buyer to every seller at the trough, (ii) they are the enforced seller to every buyer at the peak, and (iii) because their order book tells them precisely when each trough and peak is occurring through the day.

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