In theory, a more informed investor will make better decisions and therefore have increased returns. Customer education is available from industry groups and brokers to help traders avoid pitfalls and have a disciplined investment approach. Market guru’s and advisory services will tell you what they are doing for a price but their style and risk tolerance may be drastically different than yours.
The age old axiom of “teach a man to fish” certainly applies to investing. Traders are eager to make money but often lack the knowledge and discipline to repeat it for themselves. The educational component is a readily available commodity with the basic unanswered question of how to use these markets for better results. Your broker wants you to make money. They often provide investment tools to help have a more successful client.
The process of knowing an investment strategy is the first step and only useful if you can identify when to employ it. Learning a new strategy can add to overall market knowledge but is not necessarily the reason to use it now. Market conditions change and there is not only one right way to invest. There are many wrong ways however, with the lack of risk control and improper allocation among the major errors made by eager traders looking for immediate results.
Think of the educational components as the building blocks for a house. You must have a basket full of tools and strategies to select from. Trading techniques will vary but a solid foundation must be built for long term success and stability. That base is investment discipline. When that is incorporated into every trading plan, the choice of how to invest is less important.
When you break down the market dynamics, it can move in only three directions: up, down, and sideways. These are the only choices with the variable of over what time frame to determine the appropriate investment strategy. After evaluation of a probable market direction, then specific action can be taken. Without the full toolbox, conditions might leave you with only a screwdriver to nail wall studs together. It can be done but it is a lot more work and effort and may not produce the desired end product.
The reason to learn new techniques is to know when to and not to use them most effectively. Add a new strategy to your repertoire and have it ready for the ideal situation.
The first step is identifying the market direction of candidates with a high probability of success. Once that is complete, determine which bullish, bearish or neutral strategy fits the individual investment profile.
A simple matrix of trading variables can help determine appropriate strategies. The level of trading activity and position monitoring, risk averse versus not risk averse and limited profit versus unlimited profit potential can create this financial and personality profile. This information can aid in self evaluation and assist in determining what type of trader someone is and therefore what investment strategies can help them reach their goals most comfortably.
Combining the present market condition information with the financial and personality profile completes the picture of who you are as an investor. This trading style focus allows concentration on discipline and methodology.
Most of us were taught at a young age that there is a right tool for any job. Fortunately there are many ways to build an investment portfolio. Investing gives you the flexibility to select a strategy that fits your needs but also still effectively gets the job done. A well thought out balance of risks and objectives determines the investment choices in a personal way.
