There are many misconceptions beginners have when embarking on this journey. One of the most common is mistaking trading for investing.
We hope we’ve helped to clear this up in the previous topics, but on the off chance you’re still uncertain whether investing or trading is right for you, below are some key considerations that may help you decide.
Time Availability & Commitment
Trading and investing demand varying levels of time. While investors will commit significant time towards researching prospective investments and monitoring existing ones, for the most part, the overall commitment of time is low in comparison to traders.
Traders are often required to commit far more time, far more regularly because their actions are often directly responsive to short-term price movements and market volatility.
By constantly being tuned into what’s going on in the markets, traders can better determine the right time to enter and exit trades, helping them maximise profits and minimise losses.
Traditional financial markets are typically open only on weekdays, whereas cryptocurrency markets are open 24/7. This can mean a trading opportunity or threat can present itself at any time. While this can be exciting for active traders, it can also be incredibly time demanding.
If you work full-time or have other ongoing high-priority commitments, such as parenting or caring for others, trading may be demanding on your time and possibly create undesirable pressure elsewhere in life.
For those who already have demanding lives, Investing may be a better option for you as it can provide exposure to profit-making opportunities without such a high level of demand on your time.
Personal Psychology & Risk Tolerance
It is important to be honest with yourself about your personal tolerance for risk, financial situation and ability to handle stress when choosing whether to invest or trade. For example, if the thought of losing money whilst you sleep is enough to keep you up at night, you may find trading an extremely stressful endeavor. Traders are often far more tolerant of risk than investors as they have to manage various layers of risk with every trade that they engage in.
Furthermore, if you often find that stress, emotions or impulses impact your ability to make logical financial decisions then trading could be very risky for you. Trading can involve making difficult decisions in short periods of time under stressful conditions.
For instance, you may find yourself in a losing trade which is going rapidly downhill so you decide to exit your trade for a loss, but then to compensate for the loss you decide to engage in another, perhaps riskier trade to try and recover your losses. The riskier trade also yields a loss and the cycle repeats itself, potentially wiping out your trading portfolio in a very short span of time.
Whilst both traders and investors battle psychological demons, traders have to confront them far more often than investors. For this reason trading is often considered far more psychologically demanding. However, whether you choose to invest or trade, both carry risks that need to be considered regardless of your risk appetite.
However, investing is not without its psychological challenges, especially in the relatively volatile cryptocurrency market, where extraordinary gains and devastating losses can be made within a very short period.
For instance, you may be researching a cryptocurrency in the morning and by the afternoon its price has increased by 100%, this immediate price rise may cause you to panic that you are missing out on an opportunity, so you rush into an investment only to find that its value decreases by 90% a few short hours later all but wiping out your investment.
Find an investment or trading style that aligns with your emotional and behavioural tendencies. You do not have to worry about imitating someone else, but understanding your personal psychology and risk tolerance can help you choose which is right for you and the trader or investor you become.
Both trading and investing often require some level of skill in performing a fundamental analysis of investment or trade opportunities, but trading also demands a high level of skill in technical analysis – the discipline of identifying statistical trends on charts to inform trade decisions. (We cover fundamental and technical analysis later in the course.)
Skills in technical analysis can take days or months to learn, but often years to master. Like all things, some people are more naturally skilled at trading than others. For many, this may prove to be a deterrent and for others this may indicate to them that they need to be more committed, work harder and devote more time to mastering the discipline than others. If you decide you’d like to learn how to trade, consider educating yourself or learning from an experienced trader.
Choosing Which Is Right For You
When assessing whether trading or investing is right for you, you should appraise your own skills and abilities alongside your level of commitment, available time and goals and objectives to determine which makes the most sense.
The honest truth is that most people entering this space don’t often have the level of commitment, time availability, or level of skill necessary to become a successful trader—and that’s perfectly fine!
It’s important you assess your abilities with honesty so you can make as best a determination for you as possible. We find most beginners end up becoming investors rather than traders, but some even become both over time as they discover their passion and interest for financial markets.
Once you have understood whether you’re an investor or trader, you can start to think about the degree of risk you’re willing to take on in your investments and/or trading.