Investing vs Trading Forex

There are some important differences between investing and trading, even though some people may use these terms interchangeably without giving it much thought of what each entails. Advantages can be found in both ways of growing your money, neither is better than the other – they have different roles. But when it comes to growing your wealth in the forex market, trading is usually the way to go due to the unique aspects of this market.

Value ownership

Investors are concerned with acquiring the ownership of the financial instrument; they have the confidence that the instrument will continue to rise in value. They tend to “buy low and sell high”. For example, when they see that the stock price is going down, they may see it as a good opportunity to buy and own the stock ‘cheaply’ so that they may profit when the stock goes back higher in the future.

Traders, on the other hand, do not have much concern with the buying and owning of the instrument. They exhibit the same ease with either longing (buying) or shortselling the instrument. Unlike investors, traders are more willing to buy ‘high’ in the hope of being able to sell even ‘higher’, or short-sell ‘low’ in the hope of being able to buy back later at an even ‘lower’ price.

Time frame

Investing usually entails the “buy and hold” concept, whereby an investor’s goal is to acquire a financial instrument and to hold it for medium to long term, in the hope that the instrument will rise in significant value after a certain period of time. Trading couldn’t be any more different. In trading, a trader’s main goal is to profit whichever way the market goes, whether upward or downward, within a shorter time frame. While there is short and long term trading, the holding period rarely extends beyond more than a few months, or longer than a year.

Getting in

Serious investors tend to buy an instrument based on the underlying fundamental reasons. For instance, savvy stock investors will analyze the background of a company, pour over its quarterly earnings report, assess the company’s reputation and strength in the particular industry sector, and assess the potential of its products and the track record of the management team. Traders, however, tend to look for high-probability trade setups using technical analysis as their favourite tool, and many of them also incorporate market sentiment into their trading decisions. Short- term traders are quick to recognise changing market trends, and take advantage of price swings in the market, whether in range-bound or trending environments.

Getting out

The “buy and hold” mentality of investors tends not to deviate far from “buy and forget”, as many investors almost have zilch idea of when to get out of their investment when things do not go well. Many stock investors are left with worthless stocks as they do not have stop-loss boundaries or know when to cut their losses. While there are also many traders out there who do not have risk management rules in place, traders overall are generally more aware of proper risk management than most investors. Whether or not they translate these rules into practice is another thing altogether.

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