Active Trading Vs Passive Investing

Passive investing and active trading are the two ways to

approach the stock market. Everyone will argue about which way is better and which way is safer, but in the end it comes down to which investment strategy is right for you.

All and all active trading has been shown to outperform passive investing, if it is done right. However if it is done wrong it could also come with huge losses.

Actively managing your account can be helpful to cut your losses before they get too big, let your winners ride, and make use of compound interest.

To be a successful with active trading you should have these qualities.

1. You are unable to stomach huge losses so you cut your losses short. Cutting your losses short is the best thing you can do. You never want to buy a stock and ride it down 30%.

2. You can develop a trading plan and stick with it, even when times get hard. Developing a trading plan is the only way to actually make money in the stock market. There is a famous quote, “If you fail to plan you plan to fail”

3. You can control your emotions. This is a big one. All traders struggle with their emotions, but if you cannot get past them and follow your rules you shouldn’t be a short term trader.

4. You can accept losses. As a short term trader YOU WILL experience losses. And from time to time you will experience a number of losses in a row. You must be able to get through those keep your losses small and keep following your plan.

5. You have a willingness to learn from your mistakes. Everyone likes to think that they are the smarter than the average person and they do not make mistakes. Well guess what everyone makes mistakes. The important thing is learning from them and incorporating it into your future trading.

6. You are willing to play both sides of the coin. The stock market goes up and down. The best traders in the world learn to make money when stocks go up and when stocks go down.

7. You have time. A big part of active trading is just that, you have to be active. You must keep learning, keep testing, and keep paper trading at all times. Remember the more you learn the more you make so do your best.

If you are too busy to trade an active account or if you would not feel comfortable trading you can still make a good return by passive investing.

Basically when you approach investing passively you are not going to check your stocks every day or week. Instead you want to find high quality companies that are undervalued and diversify your money.

To be a successful at passive investing you should.

1. Be willing to hold onto a stock for the long term. This includes keeping stocks that are creating huge losses provided the companies are still quality companies.

2. You don’t have time to check your trades. If you don’t have time or simply don’t want to check your trades every day you would be better off as a passive investor.

3. You are willing to just be bullish. Sorry but stocks fall too fast for you to be passively shorting. In the long run stocks go up. So if you are trading for the long term you have to be bullish.

4. You realize that the market can be irrational at times. Stocks can stay undervalued for a loooong time. If you are more long term focused you have to believe stocks will eventually be at the price they should be.

5. You can afford to let your money sit for years. If you have money that you can let sit for a while, like 10 or 20+ years then you can afford to invest for the long term.

In the end it really depends on you and how much time you can/want to devote to the stock market. Don’t start trading actively if you are only going to check your stocks once a week it needs to be a part of your daily routine.