A lot of people confuse the terms trading and investing, or use them both interchangeably.
However they’re not the same: I should know, I used to be a forex currency trader for 2 years.
Having done both trading and investing, there are big differences between these 2 strategies:
- Trading focuses on buying and selling assets in the short term i.e. days, weeks, or months.
- Investing focuses on buying and holding assets for the long term i.e. for years and decades.
- Trading is more active in nature; you need to show up every day to place or monitor trades.
- Investing is more passive in nature; you buy assets once, and check up on them over time.
In this article, we dive a bit more into the primary differences between trading and investing.
As well as that, I share my own experiences on trading and investing and which one I prefer.
More importantly, we discuss which of these 2 methods are best suited for FIRE enthusiasts.
What is Trading and How is it Different to Investing?
Trading is where you buy and sell assets (stocks, currencies, funds) over a short time period.
By short time period, I’m talking days, week, and months, and sometimes hours and minutes.
The idea is that you look at the markets every day, and pick a few assets you want to trade.
After doing some analysis, you tell the trading software to enter a trade at a certain price.
You then tell it to exit once it reaches a certain price and theprofit gets added to your account.
This is trading in a very brief description. As you can see, it is much different to investing.
With investing, you choose the assets (stocks, bonds, funds, etc.) that you want to invest in.
You then buy as many units of those assets as you can with the money you have to invest.
You then continue buying more assets over a regular time period i.e. whenever you get paid.
And that’s it – you keep buying more assets and monitor them as they appreciate over time.
The Main Difference between Trading and Investing
The main difference with trading and investing: With trading, you’re not really buying assets.
Allow me to explain. The first thing you need to do with trading is open up a trading account.
The guideline is to ideally have around $10k to start with, so that your profits are significant.
Once you have your account set up and funded, you then need to consider risk management.
General guideline: you shouldn’t risk more than 2% of your account e.g. 2% of $10k is $200.
This means in a trade you could either profit $200 if it goes well, or lose $200 if it goes wrong.
Over the course of a week you might close 10 trades: 6 of them might be winners and 4 losers.
The idea is to try to have more winning trades than losing trades over the course of a month.
However, you never really own the assets: you just make a profit if your predictions are right.
You might be thinking: what is the benefit of this active trading versus just passive investing?
Why would Someone Trade instead of Invest?
In theory, you could make a lot of money with trading, in a relatively short amount of time.
Let’s say in a week you close 10 trades: 6 of which were winners and 4 of which were losers.
Assuming that you’re using a $10k account, you would have made a $400 profit over a week.
Repeat this over the course of a month and you could increase your account by 10% a month.
As you see, this is much faster than investing where you might grow 10% over an entire year.
Not only that but with trading, you don’t need to have a big account; you can apply for one.
Companies will give you $10k, $50k, or $100k trading accounts if you show you’re profitable.
What they usually ask for in return is a share of the profits you make; usually 80-20 or 70-30.
Trading can be lucrative: you can make money quickly and you don’t even need much money.
So why isn’t everyone trading and why did I stop forex (foreign exchange) currency trading?
My Experience with Forex (Foreign Exchange) Currency Trading
What I liked about trading was unlike having a business, I didn’t have to build or sell anything.
I also liked how it was all to do with numbers, software, and analysis: no customers involved.
I purchased an expensive course, took coaching classes, and learnt everything about trading.
For two years, every day I was in and out of the markets, making trades and honing my skills.
I even qualified for a $10k account: it meant that I could accelerate my profits exponentially.
However, regardless of all that time, money, and energy spent; I didn’t make a single penny.
At the start, things seemed to be going well: I was closing winning trades within my first week.
But over time, for every winning trade, I was making 2 losing trades. I was losing money fast.
Although I qualified for the $10k account, I eventually closed it because it was not profitable.
After 2 years of courses, coaching, and investing all my money: I had nothing to show for it.
Trading or Investing for FIRE Enthusiasts?
In my opinion, just stick to Investing: you can’t go wrong. It is so much less stress than trading.
The returns are not as great but having done both, my returns from trading are non-existent.
Investing is more passive: you just buy index funds and let the markets do the work for you.
With trading you show up every day and place trades or else you don’t grow your investment.
That’s not to say that you can’t do both: you could certainly be both an investor and a trader.
However, I’d have investing as my primary wealth building tool and trading as my secondary.
Investing is so passive that it allows you to do other things like trade or work on a side hustle.
But if you’re relying on trading for retirement planning, that would be so stressful for me.
For all you aspiring Early Retirees, I’d stick to doing what you do best: investing in index funds.
It’ll take you longer to retire, but it’ll be an enjoyable journey as opposed to a stressful one!
To find out more about early retirement, check out our articles on retirement and investing.
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