Psychological Analysis. Adam Sarhan

      Some investors love to buy stocks that fundamentally disrupt and change the way people behave. Two great examples of disruptive companies are Amazon and Apple Inc. Amazon revolutionized the online shopping experience, and Apple's technology and design radically changed computers, tablets, mobile phones, and the music industry—just to name a few. Those who saw potential in these companies (and countless other disruptive companies) and bought shares early saw explosive growth. That said, many potential disruptors fail, and speculators who move early take the risk of potentially big losses in exchange for the opportunity of a big score.

      Growth

Growth investors love to buy stocks that exhibit strong earnings and sales growth on both a quarterly and annual basis. On average, these people are more inclined to focus on growth and not on typical valuation metrics. These may be companies like Netflix, which, as of this writing, has grown beyond its initial disruption phase and continues to grow its top line (another way of saying revenue or total sales) and bottom line (another way of saying earnings or net profit after you subtract expenses from revenue).

      Hypergrowth

      A stock doesn't necessarily have to be a disruptor to have explosive success. Some businesses, with the right products, at the right time, with the right leadership, can experience spectacular expansion. Think of the rise of Starbucks since the late 1990s. Wouldn't you have liked to own Starbucks shares before there was a store on practically every corner? Hypergrowth investors seek out companies that are poised to experience rapid expansion.

      Growth at a Reasonable Price

      Growth at a reasonable price (GARP) is another common category that people look for. If you see a stock that has strong earnings growth but is reasonably valued (remember, valuation is largely subjective), there will be a segment of the investing population that is happy to buy those stocks with the hope of relatively steady, although not always stellar, returns.

SPECULATORS

      Speculators are traders who look for stocks experiencing strong price movement in the market in one direction (either up or down). On average, these traders will likely take a long position in stocks that are moving up and short stocks that are moving down, and they will have a strategic exit point planned for when they sense the ride is over. Stocks seldom experience sustained price movement for long periods of time, so by nature, most speculators tend to take short‐term positions.

      At the end of the day, speculators take a view on an opportunity, risk their capital, expect a positive outcome, and manage their risk accordingly. Some trades are profitable, but—and this is important—most are not. That is the reality of this business. The trick is to win big when things go your way and keep your losses small when the market moves against you.

I believe that both investing and speculating are good and healthy for global capital markets. I consider myself both an investor and a speculator, but when I identify opportunities, I make a very clear distinction between investment opportunities and trading opportunities. I apply a different strategy for each and, perhaps more importantly, I don't confuse the two as I execute my strategy. A big part of knowing what mode to operate under (trader or investor) is to understand the time frame during which I'll be trading a particular asset. Another tactic I use is to have different accounts for different strategies. This way I know that one account will be used for trading and another will be used for investing.

PROFITS ARE A FUNCTION OF TIME

      When Warren Buffett describes his first investment—the $144.75 he put in the market in 1942—he provides two key details: the price he paid, and the time the investment was held. To make money in any market, anywhere in the world, you need two basic components: time and price. Put simply, profits are a function of time.

      Time is a necessary and critical component of any successful market strategy, even for short‐term traders. To realize profits in the market, you need to learn how to allow time to pass. That means you have to work patience into the hard rules you develop for your trading strategy so you don't overreact to temporary market fluctuations (a.k.a. wiggles and jiggles).

      The second component in our profit equation is price. You need the price to move in your favor. When you take a long position in a stock, you want it to go up, and if it does, your strategy should have rules in place to determine when you will sell. If the price fails to rise, you should also have rules for determining when to sell and cut your losses.

OPERATIONAL TIME FRAMES

      Some people choose to operate on an intraday basis—day trading. It is very tempting to day trade, and it may work at times, but I would be remiss not to note that since I started trading in the 1990s, I have yet to meet a day trader who is successful over multiple market cycles in the long term. Swing traders prefer to make their decisions and hold a stock for a few days to a few months. Position traders prefer to make their decisions on a weekly or monthly basis. Longer‐term investors prefer to make decisions quarterly or annually.

Many financial advisors meet with their clients quarterly or annually to execute long‐term investment strategies. When I developed my first trading newsletter, I found that publishing weekly made the most sense, and I began looking at market trends on a weekly basis, making my buy, sell, and hold decisions mostly on the weekends when the market was closed. That worked best for me and my strengths. I am very good at analyzing the macro landscape—the “big picture”—and very bad at micro details. On Wall Street, I've learned (and it took me many years to learn this) that I do very well interpreting weekly charts, and do very poorly at trying to make a decision based on a one‐minute intraday chart.

      The good news is that there is no right or wrong when it comes to the investment rhythm you choose; you can make money in any time frame. The key is to find the trading strategy that works well for you.

PICK YOUR TIME FRAME: SHORT, INTERMEDIATE, OR LONG TERM

      There are three primary time frames that matter: short, intermediate, and long. From a trading standpoint, “short” is anything under one month, “intermediate” covers strategies spanning one to 12 months, and “long” describes investments that will take longer than 12 months to be realized.

      Short‐Term: Scalping

      Short‐term trading ranges from high‐frequency traders—people who use computer algorithms that are built to capitalize on extremely short‐term price movements—to short‐term discretionary traders—day traders—who sit in front of their screen watching every tick. “Every tick” is market jargon, and it means “every time the market moves.”

      People who use high‐frequency trading (HFT) tend to trade faster than you can read this sentence. They are a relatively newer force in the market and they place trades based on computer algorithms that can process information faster than the human eye can read it. Just like every other trading system, some HFT algorithms work, and some do not. If you decide to focus on day trading or very‐short‐term strategies, just be aware that the odds of success are stacked against you. Just about every credible piece of research shows that super‐active short‐term discretionary traders underperform the market. Research also shows that there is an inverse relationship between the number of trades you make and your performance.

That means that most people will do much better if they get out of their own way and let their money work for them. That may seem counterintuitive because we are taught to work hard for our money, but on Wall Street, you want to learn to step back and be okay with your money working hard for you.

      Intermediate‐Term: Swing and Position Trading

      As previously mentioned, the intermediate term is