Anyone remember the financial crisis back in 2008? The markets were crashing, losing more than 50% at one point, and while people were cursing the ‘crooks’ on Wall Street, they were dumping their portfolios for huge losses and vowing to never again invest in the markets. The markets bottomed out in March of 2009 and have been higher for 8 consecutive years now. This is what happens when you let EMOTION rule your investments or your trades. The reason it is such a huge problem is that the average investor has no plan. Buy, hold and hope. This is a very difficult way to approach the stock market.
I think the chart above clearly reflects that having no STOP LOSS or EXIT STRATEGY is a very BAD IDEA. This is why traders are often times far more prepared for negative situations than average investors.
So, when we look at the main difference between investors and traders, the one thing that continually arises is the lack of a plan for long term investors, whereas every professional trader has a trading plan. It’s the ONLY way to make money in this business. A good trader knows his entry, protective stop loss and target BEFORE he enters any trade. Thus, why are traders referred to as gamblers, and investors considered to be smarter? It’s a simple lack of understanding about the trading business. That’s it.