Investment instruments come in all manner of varied types and forms, but the investors that buy them generally fall into two distinct categories.  One group, the “Buy-and-Hold” variety, prefers to study companies, searching for value stocks that will stand the test of time and provide long-term investment returns sufficient to meet their goals and objectives.  The opposite group is the “active management” clan, which seeks short-term profits from arbitrage opportunities in the market generated by the waves produced by supply and demand forces seeking equilibrium.

Each group has its proponents and detractors.  Debates over issues of style can easily reach raging proportions, but the facts are that each type is required in today’s marketplace of stocks, commodities, currencies and options.  Liquidity would not be present without active trading.  Stability would be difficult to come by without investors with a long-term horizon.  The dichotomy is that major investment management firms may espouse a “buy-and-hold” strategy to their retail customers, while actively day-trading the firm’s capital in its back office operations.

A long-term investor can benefit from an education in short-term trading techniques.  The chart below for Microsoft will illustrate a case in point:

The key lesson to take away is that all investors should be concerned about timing issues when contemplating an entry or exit from the market.  A conservative Trader would have bought “MSFT” in early February at $28, sold at $30 in late March, bought at $29 a week later, and sold at $31 near the end of the week.  Unless he was also a short-seller, he may have stayed out of the market until it made up its mind, but his take for three months of trading would have been $4 or 14.3%, better than the annual return of 10% for the S&P 500 since 1926.  A more aggressive trader could have done much better than this, but even the smaller result clearly demonstrates the appeal for active management strategies.

A “Buy-and-Hold” investor would cry foul over the above discussion.  It is very easy to look backward and construct a successful day-trading scenario.  However, it is much more difficult under a stressful day-trading environment to accurately fix overbought and oversold conditions.  This argument does have merit, some of the time.  Chart indicators, RSI and MACD above, do give false signals from time to time, but you do not expect perfection from indicators.  You do expect consistency, and these two indicators in tandem have stood the test of time as evidenced by their popularity and repeated use among the best forex broker trading platforms.

The benefit for the “Buy-and-Hold” investor is in the evaluation of proper entry and exit points, as relates to either purchasing a stock, re-balancing of one’s portfolio for risk reasons, or disposing of a loser (it does happen!).  If you were considering buying “MSFT”, would you like to buy at $31 or at $25?  If you bought at the former price, it might take over two years to make up the “24% opportunity gain” that you passed on by not looking at the “technicals”.  Charting techniques may base their signals on past information, but markets do gyrate in search of balance.  It makes sense to buy at the bottom of a wave instead of at the top.

The benefits of long-term investing are well documented.  Continued investment over a long period of time minimizes risk and achieves a multiplier effect that can only happen if you are in the market.  However, entry and exit points are important.  In conjunction with a review of fundamental data, the benefits above can make you a happy trader.

A guest post by
Bryan Sayers of ForexFraud.com

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