There are many compelling perspectives on how to trade and invest. I do feel that all perspectives have their own benefits. However, I believe that we should always be reflexive towards current market conditions. This is to ensure that we do not react poorly to the market and suffer greater losses or yield less profits.
In this post, I will describe compare three main types of traders and investors. After which, I will be making some suggestions on when we should utilise those methods during specific market conditions.
Types of Traders and Investors
1. Passive Investors
Many of us in Singapore are passive investors, we assume price fluctuations are not an issue to our portfolios and make very few trades in a year. For example, passive investors also self initiate dollar cost averaging at their own time and pace. Others will only check the market for bargains when there is excess capital to purchase or accumulate shares.
- Smaller diversification
- Dividend yield driven
- Value hunters when there is a huge dive in the market
2. Active Investors
Active Investors are like hybrids as they do not only look out for value purchases but they will weigh their opportunity cost when an exit opportunity arises. At some point in time, active traders will look out for potential entry points after they have made a decent profit from another counter. This allows them to “buy low sell high” and not waste their yields as the market is generally volatile. To some extent, active investors usually buy at higher volumes or dollar values to break even sooner with their trading commissions.
- Buy higher volumes per trade and much higher volumes if price is at major support lines
- Consider exits when hitting resistance or slowing momentum
- Falls back on Dividends if entered at a wrong price
- Primary focus on holding for as long as possible if entered at the right time
3. Active Trading
In general, active traders are very different from investors. This is because to maximise yields, you cannot afford to make losses through loss of opportunities costs neither can you afford to wait for slow growth. This means that you will need to keep track of trade volumes, volatility of the market and latest news to decide whether to hold or let go of a long or short position. Most active traders will also use instruments such as leverage certificates to maximise gains.
- Full time monitoring
- Daily Leverage Certificates
- High Volume purchases (especially for penny stocks)
- Targets set on a daily or weekly basis
Summarised Table
| Passive Investors | Active Investors | Active Traders | |
| Time spent (Daily) | Minimal (10 mins) | Moderate (1 hr) | Up to 7 hrs |
| Resource | Smaller volumes | Larger volumes or dollar amounts | Unlimited |
| Risk | Moderate (mainly paper losses or loss in opportunity costs | low to moderate | moderate to high |
| Returns or Losses of Capital | +/- 5-7% per annum | +/- 10-15% per annum | Unlimited |
Suitable modes during specific market conditions
1. Passive investors – Good/Stable Market Conditions
During stable growth, markets will usually have steady growth or enter into long term consolidation. This means that even if you entered during a time when the price was higher there is lower chance for share prices to dip. Instead, most shares will appreciate as companies continue to thrive and expand
2. Active Traders – Unstable Market Conditions
Given the state of global interconnectedness, epidemics, political unrest and trade disputes will actually increase the volatility of the market and therefore rendering many share prices to fluctuate more than usual. At such times, we should utilise price fluctuations for more frequent entries and exits to ensure maximum profits from our vested capital.
3. Active Traders – All market conditions
Last but not least, traders are most versatile in the market conditions as they are more likely to short a share than active investors. Making use of leveraging instruments, they are able to squeeze profits by using “pump and dump” strategies or riskier penny stock rallies. Presently, most of such trades are made by trading algorithms and programmes rather than human traders.
Closing Thoughts
There is always a time for all strategies and techniques when trading and investing. I do not believe that there is a one size fit all method to maximise gains as a pert time investor. However there is a definite merit when practising higher levels of discipline and doing your due diligence when investing.
