Did you know that there are at least six different types of trading strategies? Join Advisors Rob McClelland and Mike Connon as they run through everything from Momentum to Swing traders and discover the pros and cons of each.
Hello. This is Rob and Mike from The McClelland Financial Group of Assante Capital Management. And this is Think Smart with TMFG.
Today on Think Smart with TMFG, Mike and I are going to be discussing the six different types of traders. Now, Mike, one of the best movies over the last year and a half was the Queen’s Gambit. And talked all about how complicated chess is and all the different pieces on our chess board.
And I saw this little article recently talking about relating to those different pieces and how people trade stocks. We know chess is very popular and become more popular because of the movie. And we know that trading stocks has become extremely popular during this pandemic because people had time on their hand. And so they all have tried their hand at trading stocks.
How does this relate to chess? And let’s look at some of the chess pieces and what would you use that as an example? What is a pawn?
A pawn could just move, simple, first move you can move two spaces. After that, you’re limited to one space forward at a time. And you can only take over on a diagonal. That’s how you take pieces. That’s your pawn. Very limited. But it’s funny, when you talk about the real chess players, they consider them an important part of the game too. They have least value, but they still, they can do some other things that are important in the game of, they can trap pieces and create problems for other players too.
That’s what it is in the game of chess. How do we relate to that in to investing? I would think a good example of that would be the day trader. They go in every day. They’re pretty limited in terms of what they can do. And they’re buying and selling individual stocks and bonds every day. And they hope to buy in the morning and sell in the afternoon or sell after they’ve made money. And they don’t have a lot of options.
They haven’t got a long term strategy. It’s just to go in. What most of them find is the survival rate of day traders is not very good. Over the years, have had lots of clients try and be day traders. None of them are day traders today.
It’s funny. You only find out about them during the decent markets. Isn’t it? I’ve never heard of a day trader in a down market. They all seem to disappear and go bankrupt.
What’s interesting is we don’t even know the name of the best day trader in the world. It’s probably because there isn’t one. What’s next?
I think we’re going to the rook. What’s the rook do?
Well, the rook has, it’s pretty much a straight line move. It can go forwards and backwards, but has to go on a straight line. It can’t go on an angle. And so it’s somewhat limited. Okay. And I think that, a good example of that might be that what we call the momentum trader.
The momentum trader, here’s what they do. They see that a stock is doing really well. And so, it did well on Monday. It did well on Tuesday and it did well on Wednesday. And they say, “You know what? This thing’s on fire. I’m going to go and I’m going to buy it. And I think the momentum’s going to continue. And I’m going to hold onto that thing.”
Unlike the pawn, they don’t have to go one piece at a time. They can go right down the whole board.
They can go right down the whole board. They can go from one end of the board to the other.
They can hold on for the long run. And just stick into when something’s doing well, they can stick with it.
And there is evidence that a momentum trader there is momentum in the market, both on the upside and the downside. What that means is when something starts going up, it typically keeps going up. And when something starts going down, it typically keeps going down. The problem is no one knows when the momentum ends on the up or the down.
What, I thought that was to be honest, one of my favorite DFA studies was about momentum because it was one of those things you thought they would say doesn’t exist. And they came back and said, “Yeah, it does exist. But the problem is to capture momentum, it takes a lot of trades. And the amount of trades involved in capture the momentum cost you more than the premium of the momentum.” They said, “It does exist, but it’s impossible to efficiently capture that.”
Makes sense. Hence the rook. Okay. Let’s move on to the knight. The knight, now that’s a tricky one. Because they go on, they go up two and one to the left or one to the right.
It’s what made me play checkers for years. I never understood.
It was too complicated.
It was too complicated.
When I think of investing that gets complicated, we think buying stocks is complicated. Buying options is really, really complicated. Okay. Now people swear by it, but the evidence shows that it doesn’t add a tremendous amount of value and you can typically lose a lot more money. You’re not actually buying the stock or selling the stock. You’re buying an option that you can buy or sell a stock. Very complicated. Like the knight. Most people don’t understand the knight. Most people don’t understand buying and selling options. What’s next?
You got the bishops. The bishops was my favorite pieces. It could slide right across the whole board. It just had the diagonal. And you catch the people who were never paying attention to it because they weren’t keeping an eye on the bishop and it can go and attack you. Bishops would be more like, I guess, a swing trader. Give us an example of the swing traders.
Well, it’s a little different than a momentum. Momentum is following the path that’s already been started. The swing traders, they’re thinking, “Okay, I’m going to swing to the other side.” It’s one day it’s value. Oh, oh. And remember this, it just happened recently. Growth stocks were booming all throughout 2020.
They’re trying to get the cusp in the trough. Right.
And the swing trader, they basically say, “Ah, it’s value time. And value had a good day. Now value has got two day. I’m going to go become a value trader.” Before, they were a growth trader. Once again, do we know the name of the best swing trader in the world?
Yeah. It seems like it’s should work. It’s one thing that’s stressful is because you think it would work, but the markets are so random that it’s very difficult to tell before the fact. It’s great because everyone looks at these charts after the fact.
They say, “Ah, that was a switch from growth to value. Look at that on the chart back.” And you go, “There was 2000, there was 2008.” And they can show all those points in a chart. But you can’t say, “Okay, where’s it in the future?” “Well, I don’t know.” Because they all look the same as when you’re in it. It all looks very similar.
It’s like, it’s funny. I go on these canoe trips. And someone mentioned, “I’m going to the park.” They say, “Which lake are you going to?” I say, “It doesn’t really matter. It’s all trees. It all looks the same after a while.”
It’s all trees and rocks.
All trees and rocks.
Okay. We got a couple more pieces, a couple of important pieces. The next one we’re going to talk about is the queen. The queen, she’s got great mobility. She can go pretty much anywhere at any time and make as many moves as possible. Like what I would call the trend trader. What is a trend trader?
Well, here, we’ve talked a lot about the movements of stocks and when’s the best time to buy and sell. The trend thought, Peter Lynch was famous in the trend thought. If you find yourself going to the same store time and time again, like you go to your Starbucks, you’re a Starbucks regular, that’s a trend.
Maybe it’s not just you. And every time you go to Starbucks, there’s a lineup. That’s an example of a trend. Might be a good idea to buy that stock.
Yeah. Zoom, great example of it lately. We’re all using Zoom. We have to use it. Makes sense to own. Even it’s funny, I remember seeing when Obama was using the Blackberry. And you saw that come out at that time. And that was a trend that was going. And you saw on TV where everyone was carrying these phones around. It was a trend. And it ran for a period of time. Obviously, Blackberry ran out and Apple took over, but those are trends.
We turn to the king. At the end of the day, the king is more like a buy and hold strategy. Okay. There’s not a lot of movement with the king. He can go anywhere, but it’s only one move at a time. He’s pretty limited.
He gets to castle that once in the game. The other thing that kept me away from chess all these years.
The thing is the Queen’s got more mobility, but the King’s still the king. I guess when I like it, the King’s job is to stay out of trouble. The buy and hold strategy is kind of a stay out of trouble. Don’t make big mistakes. One of the things we talk about to clients, especially when they’re retired, is avoid the big mistake. The key with the king is to avoid that big mistake.
Yeah. You got to protect your king under all circumstances.
Don’t put yourself in the line of fire.
Because once your King’s gone, that’s it. That’s check mate.
Lots of people out day trading today, lots of people think that they can outsmart the market. I’m putting my money on the king, the buy and hold. Put a little of those other things into play, diversify. I think that’s a great strategy. What are your thoughts?
As good as anything else. Best one I’ve seen so far. We’ve seen the others. And as you said, if one of them worked, you’d pick up the newspaper and it would say, “This is the solution to all your investment needs,” and we would’ve known about it.
If you happen to read an article, maybe in the Globe and Mail or Toronto Star, and it says, “This guy is the best day trader over the last 20 years,” that’ll be an interesting day. Hasn’t happened in my lifetime yet. That brings us to the end of another week. Thank you for joining us. This is Rob and Mike with Think Smart from The McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.
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